I’ve been on an employment article kick lately, and my awesome business partner, Erin Ogden, will be making a presentation about “Business Growing Pains” to the Baraboo, Wisconsin Area Chamber of Commerce shortly, so I wanted to dust off this article I’d written a while back on LinkedIn and share it with the OG+S audience. If you have questions about hiring employees and contractors, it’s something we deal with very regularly for our clients, so after reading, don’t hesitate to ask for more information.
“Yeah, we just plan on hiring independent contractors; much easier that way.”
How many times have I heard that? Basically, every time a Founder wants to start a company. The reality, though, is that almost everyone that works for your company is an employee, and if there was any wiggle room as to classification in the past – UBER killed it.
Why is Everyone Scared of Employees?
To be honest, I don’t know – that is to say I know, but I don’t understand why there is so much fear among Founders out there. Some of the reasons I hear often are:
- Payroll and Withholding. Founders don’t want to take the time to setup payroll and figure out withholding requirements. It takes a while, and paying payroll taxes and withholding is a bitter pill to swallow for a cash-strapped startup.
- Employment Agreements and Difficult Conversations. If you’ve read any of my previous posts, this is something I harp on often – Founders don’t like to have difficult conversations! In other words, hiring employees and setting expectations is hard and uncomfortable. They also think firing an independent contractor is easier and more straightforward.
- The Perceived Risk of Misclassification is Low. Many Founders think, “So what? He’s really an employee, but I have him classified as an independent contractor…what’s the worst that could happen?” I laugh especially hard when I hear that one — the risks and penalties are very high. Remember, the State of Wisconsin and the Federal Government want their MONEY so it’s in their interest to come after you! Just Google the word “misclassification” – what is the first thing that comes up?
What Does it Take to be an Independent Contractor, if I am going to hire that way?
Great question. While there is no tried and true formula – there are guidelines from the Wisconsin Department of Workforce Development. Remember, ALL of the below criterion must be met in order for a “worker” to be considered an independent contractor. They are:
- Requirement One: Maintain a separate business.
- Requirement Two: Obtain a Federal Employer Identification Number or has filed business or self-employment income tax returns with the IRS based on the work or service in the previous year.
- Requirement Three: Operate under specific contracts.
- Requirement Four: Be responsible for operating expenses under the contract.
- Requirement Five: Be responsible for satisfactory performance of the work under the contracts.
- Requirement Six: Be paid per contract, per job, by commission or by competitive bid.
- Requirement Seven: Be subject to profit or loss in performing the work under the contracts.
- Requirement Eight: Have recurring business liabilities and obligations.
- Requirement Nine: Be in a position to succeed or fail if business expenses exceed income.
However, EVEN IF all of the criterion are met – if the “totality of the circumstances” taken together still point to an employer\employee relationship, the worker is still an employee. So, a plumber could easily meet all 9 requirements, but do your workers? To distill the above 9 items, this is what I tell my clients: If you tell someone when to show up, how to do their job, and the reality is that the worker depends on the job for the majority of their income, they’re employees – plain and simple.
How Hard Is it To Hire Employees, really?
It’s not hard, and while withholding may seem tedious, that’s what an accountant can help you with. Additionally, hiring employees gives you a far greater level of control over 1) how they do their job; 2) how they look; 3) when they show up; 4) and if they can compete with you after leaving. Put another way, it’s hard to tell a plumber he can’t plumb for someone else after he fixes your toilet – i.e. enforcing “non competes” against independent contractors is hard — if not impossible.
So, get over your fear and take the leap! The systems you need for a successful business are the same regardless — and eventually, most Founders want employees, so bite the bullet and realize that everyone is probably one already, and the risk of “just hiring contractors” is costly, much moreso than setting up payroll.