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Am I Hiring A Contractor Or An Employee

Throughout the years, I have had many employees work for me.  On occasion, I found that I was busier than I could handle even with my employees and needed some help.  I have a friend who is in the same business as me, but has only a part time employee since he is a smaller operation.  Oftentimes he wasn’t available to help because he was very busy, but there were times when he had the time to jump in when I was swamped, and I contracted some of our work to him.

Now he essentially did the same work as anyone else working for me, but I considered him a contractor, while everyone else that worked for me was an employee.  After a couple of times I realized that it was sometimes less expensive to pay my friend, than it was to pay my employees and I reasoned that maybe I should just consider all my employees as contractors and save even more money, after all, what was the difference?

Well, being cautious, I investigated the situation with the tax department first, not wanting to create any unforeseen problems down the road, and this was what I learned.  I learned that there is a criteria that determines who is a contractor and who is an employee.  The chief criteria are:

Control

 Does the person you are hiring have the ability to determine when, how and if the work is performed, or does the control rest with you the business owner. Can the person you are hiring accept work from other parties? If you set the hours and are in control of how the work is performed and if the work is performed, then this favors an employee relationship.

Using my own situation as an example, when I gave the work to my friend and I knew that he still had some of his own work to do as well, it was understood that he would schedule it around his jobs to help me out.   Now if one of my employees had said that he was going to do the job that I had given him around his other stuff, I would have had an issue with that because I was the boss and made the decisions about when and how things got done.  Even after just the first criteria on the list I was beginning to question whether I really wanted to have all contractors vs. employees.

Tools & Equipment

Are the tools for the job provided by you the business owner, or the person you are hiring? If you the business owner are providing all the tools, or providing a reimbursement for the use of the tools, then this again favors an employee relationship.

I have always provided the tools that my employees used for work.  That way I always knew that the right tools for the job were being used.  It also went back to item no. 1 on the list because I have the control of when and how the work was to be done.  With my friend that I contracted to, he used his own equipment since he was the business owner and he provided all his own equipment.

The Workers Ability to Subcontract the Work

Can the person you are hiring subcontract the work? If the person you are hiring has to personally perform the services, or you have to approve of any person they hire to perform the services then this favors an employee relationship.

Having contracted the work occasionally to my friend, he always assured me that it would be done on the agreed upon schedule.  On one occasion, that I had contracted him to do a job for me, he suddenly got a rush job and rather than put my work on hold, he contracted another one of his associates to get the job done.   My employees however go to the job they are given and unless I give permission, they certainly are responsible to get it done themselves.

Degree of Financial Risk

Does the person you are hiring incur continuous expenses, and are they at risk of a financial loss. If you cover the person’s expenses and control the pay arrangement then this favors an employee relationship.

I own the business.  Therefore, I pay the expenses for tools, fuel, and hourly wages.  With regards to my contractor friend, I don’t pay for his tools, fuel or any kind of payroll.  He invoices me for the job and I pay him that amount.

Degree of Responsibility for Investment and Management

Does the person you are hiring have to invest personally in the business and are they in control of decisions that affect their own profit and loss? If they are not then this favors an employee relationship.

My friend pays for his own tools, business cards, and phones and I pay for the tools, business cards and work related phone bills for my employees.  That is the price for owning the business.  He owns his and I own mine.  I invest in my business and manage that investment to get the best return that I can.

Workers Opportunity for Profit

Is the person you are hiring in control of their revenue and expenses? Is there a chance for them to realise a loss? If not then this favors an employee relationship.

My friend is my friend, but business is still business. When he quotes me a price for a job of mine, and cannot complete it for the agreed upon price, then he is the one who takes the loss, which is the difference between the quoted price and the cost to complete, unless we renegotiate the deal. If I underbid a job, then the loss is mine.
It seems to me that a contractor is a business owner and an employee is a part of that business. After careful consideration, I felt that it was definitely a better choice for me and the way I do business to have employees over contractors. Because I want to control the way my business is run then the people that I hire are going to be employees. If however, I need help, I can always contract my extra work out to other business owners.

Use the criteria above to determine what the correct classification is for the people you choose to have work for you. One of the reasons that it is important to get this correct is for the correct payroll and worker’s compensation deductions to be made. If you classify your workers incorrectly, you may be liable for any deductions not made on the behalf of any employees and be penalized.

I hope this information helps you as much as it has helped me over the years.

Please add any comments or thoughts in the comment section below.