Employees vs. Contractors

Recently, major companies and startups have been facing challenges about the status of individuals providing services or goods to consumers using a common brand or platform such as Uber or Airbnb. While many of these challenges come from outside of the United States, a number of them have come from within the U.S. Much of it boils down to a simple but important question: Are they an employee or an independent contractor?

Why Does This Matter?

In the evolving gig economy, the distinction between the two may be blurred for many who are accustomed to moving from one project to another. However, the distinction is paramount for both parties. First, employees of a business are entitled to a number of rights and protections that are provided by local, state, and federal laws. A simple example of this would be mandated lunch and other short breaks during a workday. An employer has special obligations concerning the income tax, Social Security and Medicare taxes that must be complied with or face severe penalties and liability. Conversely, independent contractors will be responsible for maintaining their tax contributions and filing for taxes appropriately upon receiving the payment for the services provided.

Should I Have Employees or Contractors?

Like many business decisions, it depends on the circumstances and events taking place. The larger the business gets and the more control you wish to exercise over a particular position, the more likely an employee relationship would be desirable. Furthermore, the more integral the work to the operation, the more likely that you would seek to have additional protection. These might include Non-Disclosure Agreements or Covenants Not to Compete. Many savvy independent contractors may be hesitant to sign away their flexibility without additional compensation which could drive up the cost of the project.

Employees can provide stability and strength, if you get it right. Failure to carefully consider new hires can be disastrous for new ventures, particularly if the economic sector contains significant labor protections such as termination for cause requirements. One bad employee can cause your venture to have an epic fail.

What About “Work for Hire”?

Work for hire in the United States provides that the author or creator is not the person who actually did the work, but the institution that hired them to do this work. This is particularly important for creative works because copyright laws in the U.S. provide the employer the legal rights that are given to these works. While work for hire can be a useful tool to create value to a company, it should be entered into carefully if a freelance professional or developer in order to determine what rights you will have to royalties, subsequent projects involving characters, design, and other intellectual creations.

What Should Guide My Choice?

Another consideration to have, both from the ownership side and as a potential employee or contractor is the tax implications. For the business, it is more than just the cost, but also the potential deduction or tax advantages of increasing your workforce. For the individual, considering what your personal income goals are and the stability and strength of the venture for reaching professional goals.

Labor regulations are constantly changing. In an evolving world of commerce, getting fundamental relationships is key to a strong foundation for success.