Running a Small Business

Lesson 4: Subcontractors and employees

Who is an employee?

If you want to run a virtual business or if you just want to run a conventional business but don't need employees, you will often have to rely on people who take contracts to do clearly defined work. These people are not employees but, unless you are clear about what characterizes an employee, you may find that your subcontractor suddenly has rights to employee benefits, job security and you might be liable for back taxes. That's because most jurisdictions have definitions about what constitutes an employer - employee relationship and, if you're not careful, you can end up with employees without knowingly having hired anyone.

Governments and unions like employees. Their status is clear, they can join unions, they have a clearly defined salary and they pay taxes which are deducted before they get paid. There is also a view that employees are protected from exploitation and are given social benefits. None of these things apply to contract workers. As a result, governments tend to classify everyone who can possibly fit the definition as an employee. As someone who doesn't want to hire employees, you must be aware of what constitutes employment.

While different jurisdictions have different rules and while you should check with a local professional to make sure what exactly yours are, there are some general principles which are universal. Employees report for work on a regular basis, get paid a set amount for a set time period, do work that is assigned to them and get evaluated by their employer. Car assembly line workers are definitely employees - there is no way they could be considered contract workers.

On the other extreme is your typical tradesman. You hire a painter to paint your house and you sign a contract specifying how much you'll pay and what he has to do. He does the job and leaves. He may do another job or even several for you but there is no way he could be considered an employee. As a small business owner who doesn't want employees, you have to choose the "painter" model when you hire contract workers.

Typical characteristics which can lead to a re-classification of a contract worker as an employee are the following.

• The contractor works at the owner's place of business.
• The contractor works regular hours.
• The contractor has no other work.
• The contractor works according to detailed instructions.

This kind of relationship is an employee relationship, whether you signed a contract or not.

Typical characteristics for a subcontractor relationship are the following.

• The contractor has his own place of business and works there, at least occasionally.
• The contractor sets his own hours and is responsible for getting the job done.
• The contractor relies on other work for a substantial part of his income.
• The contractor is responsible for the result of his work.

As you can see, a bit of attention to how the work is set up will keep the situation clear and will avoid surprises. Interestingly enough, employees are almost never re-classified as contract workers - it's always the other way around and that's why the small business owner has to be careful.

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