It hasn't been lost on small business owners that Uber and other ride-sharing services are enormously successful without having employees doing the work. It's one of the reasons why small companies are forgoing employees in favor of independent contractors.
Todd Miller transformed his small business a year ago, shifting Classic Metal Roofing Systems of Kentuckiana from a company with employees to one using independent contractors. The change gives Miller more flexibility in doing roof replacements than he had with a small group of full-time employees. "We can hire independents who have the experience and skills that we need for each individual project. With employees, you are often asking people to do things they are not terribly experienced at," Miller says.
Using independent contractors or freelancers has many benefits besides flexibility. In a tight job market, owners can more easily find independents rather than full-time employees. Owners can also save on overhead, hiring only when they need help. They don't have costs like employment taxes and insurance, nor do they face the administrative and management tasks that go along with having employees. But the government has rules about the use of independent contractors, contending that some owners misclassify employees and call them independents to avoid the costs associated with employees - starting with Social Security and Medicare taxes that combined cost owners 7.65 percent of staffers' compensation.
Although companies have used independent contractors for generations, many small businesses began using them for the first time during the Great Recession and its aftermath. Owners have become more cautious about hiring employees unless they're certain that they have enough revenue to justify the added risk and expense. The growth of Uber and other ride-sharing services has encouraged owners in other industries to adopt a similar business model, hiring independents to do the work. That has created another potential legal issue - Uber drivers have sued the company in several federal courts, seeking to be declared employees. So far, there's been no definitive ruling.
The IRS has criteria to determine if a worker is an employee or an independent contractor, including how much control a company has over a worker's behavior and the financial aspects of the job. How long the relationship between company and worker is expected to continue, and whether the services a worker performs are a key aspect of the company's business are also factors.
Owners are found to be misclassifying workers when they're audited, increasingly by state officials who want the payroll taxes they're owed, says Nannina Angioni, an employment law attorney with Kaedian LLP in Los Angeles. Owners can also land in legal trouble when there is a dispute with a worker classified as an independent contractor; when the worker complains to the government or files a lawsuit, the employment arrangement can come under scrutiny.
But owners may not have ulterior motives in using independent contractors rather than employees, says Kyle Lawrence, owner of Berkshire Payroll Tax, a Sandisfield, Massachusetts, company that helps businesses comply with employment tax laws.
"They're busy running their businesses and they may not necessarily understand the nuances or the risks of classifying someone as an independent contractor," he says. Eric Stanton consulted with attorneys and accountants before deciding to use independent contractors for his pool cleaning business, Thousand Oaks, California-based Stanton Pools. The people working for him have their own vehicles and buy their own equipment and chemicals and Stanton does not require them to take on a job.
"It's an option. If I got a call from a potential customer, I'll say, 'it's on your Wednesday route, are you interested in taking it on?'" he says. Stanton says he has structured the business, which he says resembles the Uber model, so he could be in compliance with federal and state law. California's Supreme Court last year issued a ruling that created more stringent tests for determining whether a worker is an employee or independent contractor.
Many owners use a mix of employees and independent contractors. Chris Richardson has three full-time employees at Talent Response, a website that helps small businesses find freelancers. He uses independents when he has a surge in demand or he needs expertise that his staffers don't have. "Independent contractors are less risky, particularly in 2019's uncertain macro-economic environment. Should business contract, it is much easier to end a project with a contractor than to pay severance or unemployment expenses associated with a layoff," says Richardson, whose company is based in Boston.
Richardson also doesn't want to hire employees and then devastate them if business drops off.
"It's not responsible to be making fulltime hires if you're going to be letting them go a few months," he says.
Many owners can't afford to hire the people qualified to do the work they need. Jodi Echakowitz used an independent contractor for the first time in 2003, when she needed help for her then two-year-old public relations firm but couldn't pay someone to work full-time. Echakowitz continued to use that strategy, partly because she wanted experienced people skilled in specific areas.
"If I were to build a team of employees, each with at least ten years of experience, the salary cost would be way too high," says Echakowitz, whose company, Boulevard Public Relations, is based in Thornhill, Ontario.
One of Echakowitz's 17 contractors lives in Quebec, handling projects for French-speaking clients. Another has expertise in financial services. All her contractors work for other companies.
"Because they are working on other opportunities, they can bring diverse experiences and expertise to me and my team, and the clients we support," Echakowitz says.