Question: As an employer, you may at some time consider hiring an independent contractor. Hiring workers as independent contractors instead of as employees may help you reduce both your potential tort liability and your tax liability. Minimizing Potential Tort Liability One reason for using an independent contractor is that employers are usually not liable for torts that an independent contractor commits against third parties. Nevertheless, there are exceptions. If an employer exercises significant control over the activities of the independent contractor, for example, the contractor may be considered an employee, and the employer can then be liable for the contractor's torts. To minimize even the possibility of being liable for the negligence of an independent contractor, you should check the contractor's qualifications before hiring him or her. The degree to which you should investigate depends, of course, on the nature of the work. For example, hiring an independent contractor to maintain the landscaping around your building should require less investigation than employing an independent contractor to install the electrical systems that you sell. Also, a more thorough investigation is necessary when the contractor's activities present a potential danger to the public (as in delivering explosives).
Generally, it is a good idea to have the independent contractor assume, in a written contract, liability for harms caused to third parties by the contractor's negligence. You should also require the independent contractor to purchase liability insurance to cover the costs of potential lawsuits for harms caused to third persons by the independent contractor's hazardous activities or negligence. Reducing Tax Liability and Other Costs Another reason for hiring independent contractors is that you do not need to pay or withhold Social Security, income, or unemployment taxes on their behalf. The independent contractor is responsible for paying these taxes. Additionally, the independent contractor is not eligible for any retirement or medical plans or other fringe benefits that you provide for yourself and your employees, and this is a cost saving to you. A word of caution, though: simply designating a person as an independent contractor does not make her or him one. The Internal Revenue Service (IRS) will reclassify individuals as employees if it determines that they are "in fact" employees, regardless of how you have designated them. Thus, the IRS will not treat an office assistant as an independent contractor simply because you designate him or her as such. If the IRS determines that you exercise significant control over the assistant, the IRS may decide that the assistant is, in fact, an employee. If you improperly designate an employee as an independent contractor, the penalty may be high. Usually, you will be liable for back Social Security and unemployment taxes, plus interest and penalties. When in doubt, seek professional assistance in such matters.
CHECKLIST FOR THE EMPLOYER
1 Check the qualifications of any independent contractor you plan to use to reduce the possibility that you might be legally liable for the contractor's negligence.
2 It is best to require in any contract with an independent contractor that the contractor assume liability for harm to a third person caused by the contractor's negligence.
3 In your contracts with independent contractors, require that they carry liability insurance. Examine the policy to make sure that it is current, particularly when the contractor will be undertaking actions that are more than normally hazardous to the public.
4 Do not do anything that would lead a third person to believe that an independent contractor is your employee, and do not allow independent contractors to represent themselves as your employees.
5 Regularly inspect the work of the independent contractor to make sure that it is being performed in accordance with contract specifications. Such supervision on your part will not change the worker's status as an independent contractor.