Independent Contractor Compliance Blog

A major factor is emerging in deciding who is an employee or independent contractor-it is known as the Risk of Loss, and it applies to the contractor. Every true business enterprise is exposed to the possibility of losing money even though it works hard. Recent court decisions are giving more weight to this element-the Risk of Loss.

Employees are paid for their time and reimbursed for expenses

You hire an employee at an agreed rate of pay per hour/day/week/month and as long as the worker is doing the work for that period they get paid. Their only expenses are getting to and from work and possibly some small tools they use, or the clothes they wear on the job. As the employer you pay all other expenses incurred on the job; such as, travel, supplies, equipment, facilities where the work is done, advertising of the product or service, etc. The government will even help the employee collect if you fail to pay him/her properly. The employee is only responsible to show up and do the work you hired him/her for in order to be paid. There is no Risk of Loss.

Independent contractors pay their own way

Think of this in light of your own company. If your company doesn’t operate efficiently, regardless how many hours you put in, it can lose money. There is overhead, payroll, maybe materials, advertising…the list goes on and on. You bid a job for a flat fee and all the costs and expenses are supposed to be covered by that fee. If the company can’t perform the job within the budget too bad, it loses money. If you aren’t paid, you have to go to court to collect. Thousands of businesses go under each year because of the Risk of Loss.

A true independent contractor is a small business

Ideally, IC’s should be paid a flat fee for a finished product or service. All costs should be covered by that fee. If it takes the consultant ten hours or one hundred hours to do the job he/she still receives the same amount of money. If the job requires travel the cost should be absorbed in the flat fee. The consultant who is paid by the hour and claims expenses like your regular employees looks more like an employee than an IC.

The Risk of Loss alone is not the only element

Paying your consultant by the hour alone will not automatically make him/her an employee, nor paying a consultant a flat fee will not by itself guarantee he/she is an IC. 

That’s because there is almost never any individual factor that will decide if an individual is an employee or an independent contractor under common law rules. However, the Risk of Loss for the consultant is one of the most important factors to consider.

What’s next?

Are the contractor and the company so interdependent neither can live without the other?