April 19, 2021
I need help! But do I hire a contractor or employee?
The Golden Rule Of Online Business: Treat Contractors The Way You Want to Be Treated (+ Laws Matter)
When you started your business, you probably didn’t realize all the intricate details that go on behind the scenes of the brands that inspire you. It takes a village to run a business! And whether that be marketing, internal management, your client work, or your daily communications and messaging, it can feel impossible to keep all pillars standing and secure when you are doing it alone.
There is a pretty big trend in the online business world to hire and outsource to get to the next step. Here’s the thing, it is tough to figure out exactly what you need to outsource to move your business forward. Don’t know how to engage on Instagram? Outsource it! Don’t know how to write blogs? Outsource it! Don’t feel like creating a lead magnet? Outsource it! Don’t have time to make lunch? You guessed it… Postmates that shiz.
This type of outsourcing is a quick fix; a band-aid to free up some time with the intention of you being able to use that time to propel your business forward (or give you some space to take a break – GOD FORBID!)
I’m not here to demonize the outsourcing of contractors- as a consultant, I work as a contractor too! What I am hopeful you take away from this is that you can be strategic in how you are putting together your team. Not only will this save you time, but it will also save you money in the long run, and protect the integrity and scalability of your business.
It’s tough to find a strategy that is simultaneously affordable and ethical.
Most of us started our own business so we can be our own boss, in charge of our own careers, and to make a difference. Some of us even started our businesses to run like hell away from the corporate world due to the unethical environments or the desire to have a better balance between your life and your business.
Many of us look to those who have come before us as the blueprint for how to build and scale. We look for ways to make things easier by appropriating other paths. That may work to an extent, but you don’t have to build your plan to scale the way your biz bestie or coach did.
Here is the first thing to consider when deciding how to build your team: do I need a contractor or do I need an employee?
So the national guidelines for this are pretty clear, and while there is some differentiation between states (California being the most strict) everything you need to know is listed on the IRS website.
Essentially, there is a 3 prong test to help you decide:
Type of Relationship
Additionally, if a worker feels they have been misclassified, they can file a form to the IRS, which definitely happens because contractors have to pay their own taxes. This happens a lot in the construction industry or employees who may not know the difference, and have only been employees in the past so they are expecting that taxes are already being taken out of their checks. They get a gigantic tax bill at the end of the year that hadn’t prepared for, and suddenly they owe 10s of thousands of dollars, and then they seek out help to figure out why they owe all this money, getting businesses under a microscope. THIS IS NOT A DRILL! I have two people very close to me who are highly educated and talented but didn’t know any of this, and were financially broken for years afterward paying back taxes that they weren’t expecting.
Gig-workers generally prefer to be employed by themselves. I mean, there is nothing wrong with that! (hello! It me.) But, we cannot treat our contract, gig- working, freelance experts who we hire like they are our employees. Here is how you can tell, and keep yourself and your people ethically protected.
Let’s break down these three qualifiers:
- Behavioral Factors: who is in charge of when and how they complete their work? If you have them working all their hours on your schedule, you have trained them to work within the inner workings of your business, or they are supervising other employees within the business.
- Financial Factors: who determines how the individual is paid, and how much. An employee is summarily offered a position, with an offer of pay and/or benefits that is set by the company as a whole. A contractor sets their rates and informs the company of payment procedures. Generally, contractors get paid prior to the completion of a project, and employees get paid after the hours are completed.
- Type of relationship: a company can exist, run, and deliver on their mission and purpose without the necessity of the contractor. However, if an individual is playing a key role in the forward movement, progression, development, and management of the operations of the organization, they should be classified as an employee.
Online Business Considerations
We’ve got a special industry here, and most people are in the expansion stage have the same questions:
“How much more does it cost to have an employee?”
This depends on a lot of factors, but, when you decide to hire an employee, you have complete control over how much you are paying them. You set a budget and find a person to work alongside the business, and develop and grow with you. This is a long-term solution. If your business needs help, you need to decide what you can afford, and hire someone to fit within that budget
“What is this benefit if this change to me and my business? Everything is going great!”
Contractors are experts in their field: they have one specific skill set and will bring you the best ROI in suing them for that gorgeous talent they are providing on the projects in which they work.
“My contractor isn’t going to tell on me, I’m good.”
There are other reasons besides the cost of an employee and the legal implications in protecting your business by using employees. Because you have behavioral control, you can establish policies that your team agrees to in order to protect your brand, your intellectual property, and trade secrets so they can’t go and create an offshoot of your brand and steal all your brilliance.
The US Government outlines these guidelines without the implication that an employer meets all 3, but just uses best judgement. However employees in California are automatically categorized as employees unless they meet all 3 factors of the ABC test, so keep that in mind when hiring people who live in California (more on that below).
It’s the ethics for me.
People are the most important part of running your business. Whether you build your online business HR strategy with employees, contractors, or a mix of both, people deserve to be treated respect and care. The long and short of it is, you get to decide what works best for you as a business owner; it just takes a little bit of extra time and strategy to ensure that you have built the framework of your internal workings of your brand, build the roles and responsibilities around what you need, and pat yourself on the back because the foundation of your business is solid, stable, and scalable AF.
California: You Classy little Bi*c#
These are the qualifiers for the contractor v. employee test in California. If you hire people who reside in California, you need to make sure you are acting on the right side of AB5 and AB2257 which expanded exemptions for employees/contractors in California.
They are an employee unless they meet ALL 3 of the following categories.
The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The PRO Act
The PRO Act is a piece of federal legislation written to provide clarity around the contractor v. employee relationship on a nationwide level. This piece of legislation has already been passed in the House, so when planning your organizational structure, we generally lean toward using the more strict guidelines so you don’t have to worry about changing your whole business if the laws pass.
If you would like to hear more about the PRO Act, and why the F we should care about it: (Also, Colton, but that’s besides the point).
If you want to grow and scale and build your business with a team of people who have your back, having an outsourcing strategy that includes a mix of contracted consultants and experts, and loyal employees who you develop and help grow is not only financially profitable, but it is ethically and legally compliant.