In a previous post, we talked about the decision companies face in classifying workers as independent contractors—those who receive a 1099 for tax purposes—and traditional employees who receive a W2.
Specifically, we mentioned that Lyft, in its Initial Public Offering (IPO) prospectus, cited the classification of its drivers as contractors as a potential risk for its business. In that post, we ended with a question: Why would a company expose itself to such risk by using one classification over another?
Here, we’ll talk about the benefits companies typically use to justify classifying workers as independent contractors rather than employees, even in the face of potential legal, tax, and regulatory issues.
First and foremost, let’s consider cost. After all, businesses exist to make money. “Many small business owners choose to work with independent contractors because of the perceived cost savings,” says Billie Anne Grigg in an article for Fundera. “Employment taxes, workers compensation insurance, overhead costs like office space and break-room supplies—they’re all necessary expenses when you hire W2 employees, and they can quickly erode a business’s bottom line.”
Grigg’s article lists several additional benefits of this classification.
Even in states that have employment-at-will laws, working with independent contractors often provides greater flexibility than working with traditional employees. Contractors are frequently hired for a specified time period or for specific initiatives or tasks as opposed to open-ended, long-term employment.
Less Legal Risk
In general, Griggs writes, independent contractors carry their own professional insurance to protect against their actions on the job. They also aren’t eligible for workers’ compensation and can’t file most kinds of wrongful termination suits.
Independent contractors often go from company to company performing the same functions and are able to do so because they’ve developed some specialized expertise.
There are certainly many benefits to classifying workers as independent contractors. But many employers, even when given some amount of discretion in the matter, still prefer to classify their workers as employees. We’ll discuss the benefits of that classification in our next post on this subject.