As we represent many current and new business owners in Colorado, we understand that independent contractors can be both a benefit and a detriment to a business and particularly during a business sale. We have created a three-part series that will describe what independent contractors are, how they affect a business sale, and how to make sure you are following regulations to avoid penalties or problems during a sale transaction. In Part 1 of our series, we explain the difference between an independent contractor and an employee and some of the pros and cons associated with hiring them.
In general, an individual is an independent contractor if the payer has the right to control or direct only the result of their work and not what will be done and how it will be done. On the contrary, an individual who performs services for an owner is their employee if the owner can control what will be done and how it will be done. As a business owner, it is essential that you classify your staff properly to avoid fines. If you are unsure, please click here for further information.
There are many pros to hiring independent contractors, but there are some cons as well. Before you decide how to staff your company or a particular job, it is important to understand these pros and cons and make sure your selection will follow state and federal regulations.
Below is a quick summary of the benefits and disadvantages of using an independent contractor (IC). For a detailed list, please click here.
Advantages:
- You can save money - reduced payroll/insurance expenses
- Staffing flexibility - you can hire an IC for a specific task/project, greater leeway in hiring/firing of workers
- Reduced exposure to lawsuits - ICs have fewer rights under State/Federal Laws
Disadvantages:
- Less control over your workers - a payer doesn't have complete control over the IC as they do with an employee
- Diminished right to fire an IC - a payer doesn?t have unrestricted right to fire an IC as it is reliant upon the initial contract signed
- Government audits - state and federal agencies monitor whether an owner classifies its workers as employees vs. ICs very closely; this can result in penalties/fines
In summary, it is essential as a business owner that you understand the difference between an employee and an independent contractor. In addition, it is imperative to understand the pros and cons that go along with both, so that as an owner you can make an educated decision when hiring workers.
In part 2 of our series, we will go into how having independent contractors as workers within your business can affect your business sale.
Selling a business is a complicated manner.? If you have additional questions, please contact one of our Colorado business brokers at 720.259.5099 or email us.
