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Employees vs. Independent Contractors

  Suppose you want a person who will do the little horrible jobs in your company, but yet, you don't want them classified as an "employee." You are just getting started building your business and you do not want to deal with the "employee thing."

  There are lots of reasons people want to do this. No Social Security, Medicare, workers compensation insurance, etc... However, the government will reclassify someone you label an "independent contractor" under many conditions to "employee." The nature of the work, whether you are the only person the person works for, etc. Upon such a reclassification, you will pay big time.

  Unless the person you hire to do this really is in business for themselves and provides such services for others also, you run a risk of getting your self into some real doo-doo. Suppose you are starting a small publishing company. You are tired of packing books for shipment yourself and you decide to hire a "contractor" to do this job for you.

  Suppose your "contractor" is driving home with a stash of books and crashes into and kills someone. Your person says your insurance should cover it. After all, he says "he was just doing his job." He suddenly forgets he is a "contractor."

  Well, you are probably hosed at this point. Likely, he will be reclassified. And you are responsible for your employee's conduct. You will be liable. Further, your insurance company would not know you had employees driving around. So, they will be none-too-happy and might well deny the claim. You can fight it in court. But, I'm guessing you lose. Your small part-time self-publishing company has just wiped you out financially. (Note: I'm not an attorney, and am not rendering specific legal advice. Just giving one possible scenario of what, I think, could happen in my humble and perverse opinion.)

  Now, despite the above, I know there are thousands of people illegally classifying employees as contractors, and no harm is befalling them. More often than not, nobody is paying taxes on social security, Medicare, workers comp. etc. Federal unemployment comes to mind also. Maybe income taxes are not even being reported... they would listen to what I wrote and just blow it off.

  However, employment relationships do turn sour and it is under these conditions that you might get hurt. (case in point, Clem, basketball coach at U of Minn. Hired lady to write player's term papers. Have more time to play ball. Win games. Fired her. Mistake. She squawked. Clem had to step down as coach with only $1.5 million in severance. So I guess there is a point here, I'm not sure what...) (OK, bad example, I'll try another. Often, it is when an "employee" is let go that he will try to claim unemployment benefits. Hmm. No one paid into unemployment. So starts the investigation, or so I'm told.)

  It is reassuring to know you can fire somebody for just cause and not fear such reprisal under reclassification. Of course, they might still hit you with a bogus charge of race or sex discrimination. Hire carefully.

  There really are only two ways to run a business. One is on the up-and-up, follow the rules. The other is to disregard all the rules. Straddling the line is usually what many try to do. I don't think it usually works. So, unless you are like Russian Mafia who can eliminate employees a la Quentin Tarantino in Jackie Brown with Beaumont in the car trunk ("He's an employee I had to let go..."), hiring on the edge will probably not benefit you.

  Which means you will pay social security, unemployment, ........... and a few others. In fact, hiring your first employee or two or three will really suck. There is a certain amount of "employee processing overhead," if you will, in time and money. Many people who discover this decide they want to go back to one-person consulting. The more growth-focused choice is just to keep adding employees. One employee might well be more trouble than he's worth. But 50 employees are certainly more productive and profitable than your company will ever be if you keep it one person. The key is to push beyond the "employee overhead barrier," if you will.

  When you first hire employees or "contractors" you should be aware of many employment issues. One, check with SBA, IRS (they have classes on employment issues).

  Look into outsourcing to people who really are doing this as a small business. Some people might not want to write books, and would rather pack them, and might be doing just what you want. Usually, you will pay more if you outsource to a "real" company, but I think the benefits (peace of mind) are worth it.

  Many people hesitate to hire others because they fear the person will not be as conscientious or do as good a job as the person could do themselves. A fear others won't care as much as you do. You need to trust other people, and hire the very best. It seems the ideal small publisher case is where you have ten employees working diligently away, editing, marketing, laying out pages, etc. And you think to yourself, "Who's going to pack the books? Everyone is too busy working on something really important. And they are all so good at what they are doing it would be a shame to take them away from it. I guess I'll pack the books myself." And, tomorrow, you will seek a new employee.

  For those who want to know what the cost of hiring an employee is, I refer you to How much does an employee cost? by Joe Hadzima at MIT Enterprise Forum.



Hiring and Firing Employees from our online guide to starting a small business.