Employed Or Independent

Feb 21, 2010

There is a popular move afoot among businesses today to shift cost from fixed to variable.  This allows the business to react much more quickly to changes in their environment, such as the recession.


According to associated Press writer, David Gram, The Society for Human Resource Management, representing company personnel departments nationwide, said it surveyed members in October 2008 and found 12 percent of them were moving to use more independent contractors, contingent and temporary workers because of the recession.


For a growing number of companies, including Target, FedEx Ground and Comcast, cutting costs means removing workers from the payroll or bringing on new workers — sometimes through intermediary companies — without making them full employees.


If a company employs the bulk of its workforce, downsizing can take time and cost a fortune (especially if severance is provided to the terminated employees).  They likely pay employee health, dental, vision and life insurance costs, for example, and the employer’s portion of payroll withholdings.  They will also be on the hook for unemployment insurance and workman’s compensation.


If that same company utilizes contract labor wherever possible, however, they are much more nimble and able to execute on plans to quickly reduce monthly operating costs.  If sales decrease, reliance on the associated independent contractors can decline accordingly. 


Shifting to a more variable cost structure, however, is not without risk.  A company needs to carefully evaluate their worker classification to ensure that they are not labeling an individual as an independent contractor when that person is really an employee.


The most widely accepted test is called the “economic reality” test.  In United States v. Silk, 331 U.S. 704 (1947), the Supreme Court identified the following factors:

  1. the degree of control exercised by the alleged employer;
  2. the extent of the relative investments of the [alleged] employee and employer;
  3. the degree to which the "employee's" opportunity for profit and loss is determined by the "employer";
  4. the skill and initiative required in performing the job; and
  5. the permanency of the relationship.


Basically, it comes down to this: if the person spends all of their time with this one company, and has no other clients, they look a lot more like an employee than an independent contractor.


Labeling your workforce incorrectly can become costly down the road, so it’s best to do your homework in advance, and classify your labor correctly at the outset.


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