When you are building a team to grow a business one of the advantages to using contract labor instead of hiring employees is reduced labor costs as you aren’t paying for equipment, benefits, and sometimes even taxes.
This makes it an appealing option to start with contract workers before moving to permanent full-time hires. So while this sounds like a brilliant strategy when businesses are in the early stages of growth, employers need to be careful. The misclassification of full-time employees as contractors can be a costly mistake resulting in expensive lawsuits and being compelled to pay taxes and additional benefits to those who have performed work for you.
Adding in that labor laws vary widely from country to country. This can be a very complex issue as different “tests” or sets of criteria are used to determine whether or not something can be considered contract work or full-time employment.
One famous and newsworthy example of misclassification comes from the gig economy. Companies like Uber, Lyft, GrubHub, and DoorDash classify their drivers as contract workers and not employees. They have been sued and Uber and Lyft have been granted an exception allowing them to employ their drivers as contract labor. In February of 2021, The United Kingdom’s supreme court dismissed Uber’s appeal against a landmark employment tribunal ruling that its drivers should be classed as workers with access to the minimum wage and paid holidays. While this victory was celebrated by drivers in the UK, in August of 2021, judges in California ruled that Proposition 22, the law that exempted Uber and Lyft drivers from being classified as employees was ruled unconstitutional.
Even if your company is nowhere near the size of Uber or Lyft, you should be aware of the considerations for how to determine if you should classify your personnel as employees or contractors. We’ve put together a checklist to help. Since we couldn’t account for every possible situation, use this checklist as a guide, but consult with your legal counsel if you are unsure how to proceed in your specific situation.
We have a few great examples of scenarios where you would hire each of these in this post.
Use this checklist to determine if a member of your team should be classified as an independent contractor or an employee. Remember that even if someone doesn’t work full time, they may still qualify as a part-time employee.
Independent contractor vs. employee checklist
You can repeat this checklist for each person on your payroll. Check all that apply.
If you checked mostly bold items on this list, you most likely have an employee. If you checked mostly italic items on this list, you’re probably working with a freelancer or independent contractor.
While this checklist is a good start, it’s not totally black and white. Like contract hires, employees may also have a contract. This contract may dictate their hours, pay schedule, and benefits and outline things like what happens if they leave or are terminated with or without cause.
Another exception may be companies that participate in a Bring Your Own Device program - this means employees purchase (and own) the equipment they work on. The company may offer some reimbursement or a stipend to choose equipment.
While independent contractors may work as many or as few hours as needed, employees may be classified based on the hours they work. Some countries consider full-time employees over 32 hours a week and part-time employees anything less than 30 hours per week. Labor laws and classifications can vary so be sure to consult any local laws. The employment benefits may vary depending on the employee’s classification. Misclassifying full-time employees as part-time employees to avoid paying for certain benefits can also have legal consequences.
Employees with temporary assignments can be classified as either temporary or seasonal employees. Examples of this might include retail locations bringing in extra help during the busy holiday season or a peak period like back-to-school shopping or a software company hiring a developer for three months to cover an employee’s parental leave.
Stay compliant with Panther
At Panther, this is something we help companies handle in a few easy clicks. You won’t have to spend hundreds of hours and tens of thousands of dollars figuring out how to hire a great candidate who lives anywhere in the world.
Learn more about how we help remote-based companies with our automated global payroll and compliance.