WHEN HIRING EMPLOYEES IN THE U.S.

By Janelle M. Lewis, Principal Attorney, The Law Office of Janelle M. Lewis

Developing a hiring strategy for your startup or SME

When developing a hiring strategy, founders and owners often consider the following when they are assessing potential candidates: skills, experience, education, ability to do the job, willingness to do the job and whether the person will fit in the company’s culture. In addition to assessing the quality of job candidates, founders and owners also determine what type of relationship they want their hires to have to the company. Do they want full-time employees, part-time employees, or independent contractors who work on either a full-time or part-time basis.

While many founders and SME owners will opt for independent contractors instead of employees as they grow their business in the U.S., simply deciding that you will hire independent contractors does not mean that your hires will be independent contractors.

While many founders and SME owners will opt for independent contractors instead of employees as they grow their business in the U.S., simply deciding that you will hire independent contractors does not mean that your hires will be independent contractors.

Independent Contractors are not Employees 

How workers are classified in the U.S. is very important and the wrong classification can can have costly repercussions for the startup or SME. If founders or SME owners hire employees, they must withhold federal and/or state (and local if applicable) income taxes and pay Social Security, Medicare taxes and unemployment tax on wages they pay their employees. On the other hand, with independent contractors, employers normally do not have to withhold or pay any taxes on the payments made for their work.

It is not about the parties agreement

While it may be in the hiring strategy of the startup or the SME to have independent contractors instead of employees for a variety of reasons, what the actual relationship is will dictate whether the person hired is actually an employee or independent contractor. Whether a hire only works part-time is not determinative, nor is a lack of a formal work agreement, or an industry standard to use independent contractors. The federal classification of a hire depends on two key factors: control and relationship. Some states have additional criteria to determine whether a hire is an employee or an independent contractor.

As ignorance of the law is no excuse, misclassifying the status of those who work for your startup or SME can have costly consequences. Founders and SME owners can face potential liabilities and penalties  from:  1)the IRS 2) the U.S. Department of Labor 3) State Tax Departments 4) State Labor Department/Agencies and 5) the workers themselves, who can sue their employers for being misclassified as an independent contractor when they were actually an employee. The costs of these liabilities and penalties can be in the tens of thousand upwards to the millions.

As ignorance of the law is no excuse, misclassifying the status of those who work for your startup or SME can have costly consequences.

How the law plays a role in your hiring strategy

To avoid the costs to your startup or SME for having misclassified workers, founders and owners can use the law as a strategic tool in developing their hiring strategy. As you draft your strategy on what your employment needs are and what type of workers you want for your growing business, take the following into consideration to determine if you need to hire employees or if you can hire independent contractors:

• How much control will you have over your workers and the work they do?
• Are you hiring workers for specific projects or the regular, everyday needs of your startup or SME?
• Do your workers use the startups/SMEs equipment to perform their duties?
• Is there an end date or is the employment relationship indefinite?
• Do you already have employees who are doing the same work as those you hire to be independent contractors?
• Can your workers work for other businesses in a similar capacity? Do they?
• Does the worker work for you through their own entity?

This list is not exhaustive and only some of the factors that founders and owners need to think about when creating their hiring strategy. Having a legal strategy for your hiring needs, however, is integral to ensuring that you have the human resources you need to help grow your startup or SME, while also adhering to the law to ensure no additional costs of misclassification.

To avoid the costs to your startup or SME for having misclassified workers, founders and owners can use the law as a strategic tool in developing their hiring strategy.

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The views expressed in this article do not constitute legal advice and legal information provided in this post should not be relied upon as legal advice. Please contact an Attorney for advice on your specific matter.

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