Employee vs. Independent Contractor

When looking to hire someone, should you hire them as an employee or an independent contractor? The answer depends on what you want from that person. An employee, or agent, is subject to more control than the independent contractor. However, an independent contractor carries much less risk of being vicariously liable for their actions and no employment tax from the employer. What does that mean? The level of control, or direction, you give to a person is an inverse proportion for the risk of vicarious liability and tax responsibility.

With an employee, you control not only what task they are assigned to, but exactly how they do it and even what they wear when they do it. That level of control carries an implied vicarious liability, which means that because you exert so much control over their actions in the course of their job, you are liable for what they do as if you were doing it yourself. The only limit to this vicarious liability is that the employee must be acting within the scope of their employment at the time.

With an independent contractor, you only control what task they are assigned. You do not get to control how they do that task. Think of a plumber or a contractor, you hire them to fix something in your house but you would not tell them how to fix it, what tools to use, or what to wear while they do so. As you lack much control over their actions, the risk of being held liable for what they do is next to nothing. They are essentially acting for themselves as an independent, hence the name. This does come with an exception though. If you hire someone as an independent contractor but dictate the manner in which they perform their task or require that they consult you for every decision then the Court can say that they were essentially your employee and hold you vicariously liable. This is where franchises, such as McDonald’s, get in trouble. The level of control necessary to ensure a consistent product, which is something you want when it’s your name on the line, can open you up to liability for the franchisee’s actions.

Some things to consider when determining whether to hire an employee or a contractor are listed below. However, these are only the most obvious factors and the final decision for tax and legal purposes is determined on a case by case basis. This means that the best way to determine your hiring policies is to first hire a lawyer.

Employee

  • Behavioral control
    • Who, What, When, Where, and How
  • Financial control
    • Reimbursed for expenses
  • Relationship of the parties
    • Employment benefits, at-will employment, long-term or indefinite employment
  • Employment contract, can only be fired for breach of that contract, temporary employment

Independent Contractor

  • Behavioral control
    • Who, What, and if the situation calls for it When and Where
  • Financial control
    • Expenses not reimbursed but eaten as a cost of doing business
  • Relationship of the parties

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