Should My Company Hire Employees or Independent Contractors?

Deciding whether a worker is an ‘employee’ or an ‘independent contractor’ is a common headache for business owners. The classification of workers affects the relationship between owners and workers. But employers are also concerned about their company’s profitability, and employment costs can be high. Owners may have to consider whether it is more beneficial to hire employees or independent contractors.

Are my workers employees or independent contractors?

According to the Minnesota Administrative Rules (the “Rules”), how much control an employer has over a worker is the most important factor in deciding job classification. If an employer exerts a great deal of control over the worker, then the worker is an employee. This seems easy to determine, but there are gray areas. The Rules note that the “total circumstances” of the work should be considered when determining the amount of control.

Some of the issues that make one type of worker more attractive to employers are:

• Benefits. Employers often pay benefits, like health insurance, as a part of an employee’s compensation. Such benefits typically do not apply to independent contractors.
• Work space. An independent contractor may or may not provide their own work space, depending on the type of job. An employer usually maintains a work space for employees.
• Flexibility. A company that hires employees will pay those workers whether they are busy or not. Independent contractors can be contracted to work on specific projects, eliminating pay for downtime.
• Employment laws. Employees enjoy more rights under state and federal law, but this can lead to more lawsuits or administrative complaints for employers.
• Taxes. Employers pay Social Security and FICA taxes for their employees, but not their independent contractors.

From a business owner’s point of view, hiring independent contractors may be better for the company’s bottom line.

But there are some disadvantages to using independent contractors:

• Loss of control. Even if there’s a contract or employment agreement, the employer may find it difficult to control the independent contractor’s activity.
• Terminating services. The terms of a contract may make it difficult for a company to terminate an independent contractor before a project is completed.
• Government audits. A number of state and federal agencies, including the Internal Revenue Service, may demand proof that a worker is an independent contractor, not an employee.

Making the decision to hire either employees or independent contractors requires thorough analysis of the type of work being performed and careful consideration of all legal issues.

Not all industries are the same.

Independent contractor status is treated differently in the construction industry than in other industries. As of 2012, contractors, independent contractors, and other business entities “that perform building construction or improvement services” are required by law to do several things:

• Register with the Minnesota Department of Labor and Industry or be exempted from registration; and
• Meet a “nine-factor independent contractor test.”

State law also lays out different criteria for workers that operate certain types of vehicles. People who drive a “car, van, truck, tractor or truck-tractor” may be considered employees unless they meet the criteria spelled out in Minnesota Statutes 176.043.

Make sure your business complies with Minnesota laws governing employees and independent contractors.