Law Q Newsletter (April 2009)

Spring is upon us! Signs of renewal and cautious optimism abound, and though times are tough, it appears that the economy is starting to show signs of improvement. Last month saw a surprising uptick of home sales in some depressed markets such as CA, an increase in consumer spending, and a 4 week stock market rebound. Now is the time to join those who are at the front of the line to bring aboard top notch attorneys, management, and staff. One low risk and cost-effective way to immediately bolster your work force is with contract employees. Bringing on highly educated and experienced contractors to complete overdue or neglected projects will help you and your company or firm get ahead of the game as your competition stagnates. Further, Law Q will maintain those contractors on its books and bill you a low hourly rate only for those hours worked.

As you may have guessed, this month's newsletter focuses on independent contractors and how they can work as a huge asset to your company or firm- even during these uncertain times. We have included three great articles on ways for your organization to stay ahead of the competition and hope you will find the pieces both relevant and useful. As always, please check out our featured attorney and legal staff candidates in the upper left hand corner of this newsletter. The resumes of both our featured candidates and our other top notch candidates can also be viewed on the 'Recruiting' page of our website.

As always, we hope your month is a great one and feel free to contact us with any of your recruiting or employment questions.

Truly yours,

R. Christopher Newton
LAW Q, LLC

p.s. Check out this link to a just-released article highlighting the potential for economic recovery in the next four months!

Employee vs. Independent Contractor: Differences You Need to Know
By Ellen Feig, CareerBuilder.com

So you're so happy you just got hired, but the person you're working for just called you a name: "independent contractor." Now what does that mean? What kind of a business relationship is that? Can you come to the company picnic? What does this mean for you?

While an "independent contractor" is different from a standard employee, the exact definition of your role is not set in stone. To prevent any unwanted surprises, it is essential to define the exact business relationship between you and your employer prior to beginning work.

What is an independent contractor?

We can look in three different places when answering this question. A sometimes difficult status to define, what makes an independent contractor has been outlined by common law principles, the Fair Labor Standards Act, and finally the decisions of some courts.

The IRS and many states have adopted common law principles to define an independent contractor. These rules focus primarily on the level of control an employer has over a service or product, meaning, whether or not the employer actually defines what is being done and how it will be accomplished.

Common law principles further define independent contractor status by method of compensation. If a person is on an employer's payroll and receives a steady paycheck, clearly that the person is an employee rather than an independent contractor, who likely receives payment in a different manner. Other considerations when identifying someone as an independent contractor may include:

If the worker supplies his or her own equipment, materials and tools

If all necessary materials are not supplied by the employer

If the worker can be discharged at anytime and can choose whether or not to come to work without fear of losing employment

If the worker control the hours of employment thus indicating they are acting as an independent contractor

Whether the work is temporary or permanent

Again, the nature of the work will help define the relationship. When work is considered integral to the business, it is more likely that the person is an employee. On the other hand, work that is temporary and non integral may imply independent contractor status.

In an attempt to interpret provisions of the Fair Labor Standards Act and discern between employee and independent contractor status, some courts and federal agencies have come up with the "economic realities test." It looks at the dependence of the worker on the business for which he or she works. If a person gains a large portion of their salary from that business, chances are that person qualifies as an employee. The test also factors in such things as level of skill, integral nature of the work, intent of the parties and payment of social security taxes and benefits. Outside of the Fair Labor Standards Act, courts ask the following questions to determine work relationship in addition to both an economic and an agency test:

What is the degree of control over work and who exercises that control?

What is each party's level of loss in the relationship?

Who has paid for materials, supplies and/or equipment?

What type of skill is required for work?

Is there a degree of permanence?

Is the worker an integral part of the business?

These courts also use the "right to control" test. When the hiring party controls the way work is carried out and a product is delivered, the relationship between the parties is employer/employee. If an employer does not have authority over how a party accomplishes his or her work but simply give requests an outline, the relationship between the parties is that of hiring party/independent contractor.

Employer Tax Liability

An employer's tax liability is determined by the worker's employment status. When a worker is an employee, employers must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to a State Insurance Fund. When a worker is an independent contractor, the hiring party is not required to make any of these payments.

Should employers incorrectly define a worker as an independent contractor, they may find themselves liable for past taxes including FICA and federal unemployment tax.

Safe harbors which allow employers to use the independent contractor status and avoid penalties include: prior practice of treating similar employees as independent contractors and the existence of a prior IRS audit where no taxes were required to be paid.

Conclusion

Certain factors will define a worker as an independent contractor in every case: not relying on the business as the sole source of income, working at his or her pace as defined by an agreement, being ineligible for employer provided benefits and retaining a degree of control and independence. While the independent contractor is his or her own boss, work stays within the definitions of oral or written contract and adheres to certain requirements. An employee, on the other hand, relies on the business for steady income, gives up elements of control and independence, is eligible for certain benefits and works within constraint of workplace.

*reprinted with permission 2009

Pros and Cons of Hiring Independent Contractors
By Steven Fishman, FindLaw.com

There are many benefits to hiring independent contractors (ICs), but there are some disadvantages as well. Before you decide how to staff a particular job, you'll need to weigh these pros and cons -- and make sure that your decision will pass muster with state and federal auditors.

Benefits of Using Independent Contractors

There are several major advantages to using independent contractors rather than employees, with financial savings topping the list.

You will probably save money. Even though most employers pay ICs more per hour than they would pay employees to do the same work, it usually ends up costing employers more to hire employees. When you hire an employee, you will have to pay a number of expenses that you don't have to pay for ICs, including employer-provided benefits, office space, and equipment. You will also have to make required payments and contributions on behalf of your employees, including:

�         your share of the employee's Social Security and Medicare taxes, which totals 7.65% of the employee's compensation
�         state unemployment compensation insurance, and
�         workers' compensation insurance.

All together, these payments can easily increase your payroll costs by 20% to 30% -- or more.

You have staffing flexibility. Working with ICs allows employers greater leeway in hiring and letting go of workers, which can be especially advantageous for employers with fluctuating workloads. You can hire an IC for a specific task or project, knowing that the worker will be gone when the job is finished. You won't have to face the trauma, expense, and potential legal trouble that often accompany firings and layoffs.

You may also enjoy greater efficiency when you use ICs. Because most ICs bring specialized expertise to the job, they are usually productive immediately, eliminating the time and cost of training.

You reduce your exposure to lawsuits. Employees have a wide array of rights under state and federal laws -- and therefore, a variety of legal claims they can potentially bring against their employers for violating those rights. Because ICs are independent businesspeople, they are not protected by many of these laws. Among the rights that are available to employees but not to ICs are:

�         the right to receive at least the minimum wage and, for employees who qualify, overtime compensation at the rate of one-and-a-half times their regular hourly wage
�         protection from discrimination on the basis of race, national origin, color, religion, gender, and so on
�         the right to form a union, and
�         the right to take time off to care for a sick family member or bond with a new child.

Employees may also be able to sue their employers for wrongful termination. ICs cannot bring this type of lawsuit (although there may be restrictions on your right to terminate an IC relationship, depending on what the written IC agreement says -- see Put Your Independent Contractor Agreement in Writing for more information on IC contracts).
Disadvantages of Using Independent Contractors
After reading about the possible benefits of hiring ICs, you may be thinking that you'll never hire an employee again. But there are also some significant drawbacks to using ICs -- and the risk that your classification decision may be questioned by government agencies.

You have less control over your workers. Unlike employees, whom you can closely supervise and monitor, independent contractors enjoy a certain autonomy to decide how best to do the task for which you hired them. If you interfere too much in an IC's work, you risk making the IC look like an employee -- for whom the law says you should be paying payroll taxes, workers' compensation insurance premiums, and more. If you want to exercise significant control over what your workers are doing and how they're doing it, classify them as employees.

Your workers will come and go. Many employers use ICs only as needed for relatively short-term projects. This means that workers are constantly coming and going, which can be inconvenient and disruptive. And the quality of work you get from various ICs may be uneven. Employers who want to rely on the same workers day after day are better off hiring employees rather than ICs.

Your right to fire an IC depends on your written agreement. You do not have an unrestricted right to fire an IC, as you might with your employees. Your right to terminate an IC's services is limited by the terms of your written IC agreement. If you fire an IC in violation of the agreement, you could be liable for damages.

You may be liable for injuries an IC suffers on the job. Employees who are injured on the job are usually covered by workers' compensation insurance. In exchange for the benefits they receive for their injuries, these employees give up the right to sue their employer for damages. ICs are not covered by workers' compensation, which means that if they are injured on the job, they might be able to sue you and recover damages.

You may not own the copyright in works created by an IC.

If you hire an IC to create a work that can be copyrighted -- such as an article, book, or photograph -- you might not be considered the owner of the work unless you use a written agreement transferring copyright ownership from the IC to you. In contrast, if an employee creates such a work, in most circumstances you will automatically own the copyright.

You face a risk of government audits. State and federal agencies -- particularly the IRS -- want to see as many workers as possible classified as employees, not ICs. The reason is financial: The more workers are classified as employees, the more tax and insurance money flows into government coffers, and the harder it is for workers to underreport or hide their income from the tax man.
Any number of state and federal agencies might audit your business if they believe you have misclassified employees as ICs. At the federal level, you might face an audit from the IRS; the Department of Labor, which enforces federal minimum wage and hour laws; the National Labor Relations Board, which enforces employees' rights to form a union; or the Occupational Safety and Health Administration, which enforces workplace safety laws.

At the state level, you could attract the attention of your state's unemployment compensation or workers' compensation agency if a worker you classified as an IC applies for benefits. You could also face an audit from your state's tax agency.

*reprinted with permission 2009

The Truth About Direct Hire Positions
by Dale DeSteno, Net-Temps.com

Why do you think you need a direct hire in order to make a living? It seems that 99% of 'direct hire' job seekers are looking for security above everything else. But the truth of the matter is that over the past 2-3 years the bulk of companies in America experienced a slowdown and were forced to layoff both contract employees as well as direct employees; but when things started coming back around in 2004, guess who those same companies hired back first....the contractors!

Contract hire work is often times a different line item on a company's budget than a direct hire employee. Companies can hire contractors without having to pay their benefits, unemployment insurance, holiday & vacation pay, (usually the recruiting firm pays for these items) or match their 401k plan. This makes hiring contractors a relatively easy and painless task for a company going through a slowdown. The projects/work might not be as plentiful, but they still need employees in order to do it!

Have you ever been with a company as a direct hire and fantasize about NOT working for that company? The road ahead looks grim and job hunting is tough to do while you are trapped in a cube 8 hours a day. But you have security there, right? You get a raise once a year, as long as the economy is strong. As a contractor you only have to stay for your project/assignment and then you are free to go (or if another project comes up internally, they might ask you to stay), then on to the next gig for a more attractive price!

Or, on the other hand, I can think of countless times where a company has hired on a contractor through me, and they were such a good match, at the end of the contract they hired the contractor on direct with a raise and all! You can't win if you don't play. In fact, there are some companies that ONLY hire certain disciplines on a contract basis before making any sort of long-term commitment. Am I talking about a 'contract to direct' or 'temp to permanent' placement? No, they are open-ended contract positions with no long-term commitment.

"I don't want my resume to look like I am a job hopper!" That's exactly what it will look like if you try to play 'Contractor' with direct hire positions. A contractor's resume may or may not even have dates on it. Companies usually don't care how long a contractor was at his/her last position. But if you show a Hiring Manager your Direct Hire resume and it has 10 different companies on it in a 3 year period, what would make the Manager think you were going to stay put at their company?

Experience

Personally, I would rather take a 1-year contract position with a certain Minneapolis-based medical giant than a direct hire position with Bob's Medical Device Company. This particular medical giant is a highly acclaimed company recognized throughout the world and the experience I would gain there is more than likely hand-over-fist more valuable than any direct position elsewhere.

Contracting is especially good for Junior level candidates who don't really know what their niche is yet. If you are a Jr. level Mechanical Engineer but you don't know if you want to do design work, project management, engineering sales, or whatever else, contracting is a great way to figure out your calling. If you start out on contract doing design work and you hate it, then once the assignment is over, you can eliminate 'design' from your checklist and move on to the next discipline.

The Joys of Contract Work

There are so many perks to working contract it's almost hard to address them all! Here a small sample: