Why Use Employees Rather Than Independent Contractors?

Companies like to use employees because it requires control of the physical details of how the work is performed.

Example: A large manufacturing company uses expensive and large-scale equipment to produce its products. The machine has to be run by several persons, working in coordinated fashion, operating the equipment in a very uniform manner. In this situation, the factory worker cannot be an independent contractor because he or she cannot be given choices as to how, when and by what means he or she will perform the work.

Example: A convenience store must schedule its workers at specific times, cash registers must be operated when customers approach the counter to pay, products to be sold and prices to be charged for items are uniformly determined. For the store workers to be considered independent contractors rather than employees, they would each have to be free to determine the items and methods used to sell the store's merchandise, free from control by the store's owner or management.

So companies perform their work through employees because they believe they can be most successful by controlling the times and physical methods by which their work is performed and by having a workforce committed to the company full-time. Exertion of control might enhance the company's success but would also most likely be sufficient to render the agents as employees rather than independent contractors.

Some companies also use employees rather than independent contractors to save costs. For instance, a company might hire an attorney to be a full-time employee at a fixed salary of $60,000 to handle its legal transactions. Even assuming additional fringe-benefits costs increase the company's expenses to $80,000 per year, a self-employed attorney performing work for the company an average 20 hours per week for a year would cost the company $104,000.

Mischaracterization of Employees as Independent Contractors

It is very important for companies to correctly characterize their workers as independent contractors or employees. Failure or refusal to properly classify employees as "employees" can have serious financial repercussions.

1. Since companies must withhold taxes and pay matching taxes on employees but not independent contractors, a finding that a company has treated an employee as an independent contractor creates an immediate tax liability for the company.
2. Employee status brings workers under the protection of various wage and benefit statutes as well as federal and state anti-discrimination laws and laws establishing collective-bargaining rights for employees.

Example: An employee is fired because of her religion. This conduct would not violate Title VII of the Civil Rights Act of 1964 if the worker was an independent contractor. It would however, violate Title VII if the worker was considered an employee, and liability would include back wages owed to the employee plus compensatory and punitive damages. Also employers are not always subject to liability for torts committed by independent contractors.