Independent Contractor – Hire or Contract?

Which is correct – hire or contract with an independent contractor?

If you told an EDD employment tax auditor you “hired an independent contractor”, you left the impression you do not understand the semantics of independent contractor test. But, if you believe you “contract with an independent contractor”, you are on the right track. What’s the difference?

Remember (or review “Independent Contractor Defined”) the main test to distinguish employees and IC’s is “who has the right to control the manner and means of achieving the end result.” “Manner and means” is how a worker does his/her work. “End result” is what a principal wants accomplished through a contract, regardless of how it becomes accomplished.

Example: Let’s say your computer stops working. Setting frustration aside, you research on your iPhone and find a person who appears to have good qualifications and excellent Yelp reviews. You call her; she is available and comes right over. She asks what is wrong with your computer. You reply, “I have no idea, I just want it fixed now for a reasonable price.” You talk and agree on a price to fix it. She starts doing things. You ask some questions and her answers seem fine to you. So, you go into the other room and wait. Time goes by and after a couple of hours, she comes in and tells you it is fixed. She then shows you how it works. You are satisfied that it is fixed. You pay her and she leaves. You “contracted” with an IC because all you wanted was your computer “fixed” now. She did fix it now. And you paid her for achieving the end result of your contract.

Just as important, you did not “control the manner and means” of how she performed her services. You were satisfied that she knew what she was doing, so left her alone and waited for her to achieve the end result. She worked as an independent contractor.

Let’s look at the second most important test of IC status: Can an IC “quit” without liability? Can a principal “fire” an IC without liability? NO!! Why?
1. An IC and principal have a contract with an end result to be achieved by the IC. The IC has a right to work to achieve the end result without being interrupted or controlled. Thus, if an IC is “fired” while working reasonably toward that end result, the principal breached the agreement by interfering with the IC’s contractual right to achieve the end result and then get paid. Thus, the principal is liable for the damages he caused, which is the loss of compensation the IC should have been able to earn after achieving the end result.
2. An IC “quiting” before achieving the end result creates IC’s liability for damages caused by “quiting” the contract before fully performing the contract’s terms, i.e. before achieving the end result. Thus, the principal may recover damages from the IC.
3. The other side is any employee may “quit” a job or any employer may “fire” an employee without either incurring liability.

Summarily, any employee may “quit” at any time without any cause without incurring liability. Also, any employer may “fire” (or terminate) an employee at any time without cause and without incurring liability. But, either contracting party may be liable for damages if he (worker) “quits” (i.e., stops) work prior to achieving the end result; or, she (principal) “fires” the IC before the worker achieves the end result. In the IC circumstance, a worker may cease work if the principal breaches the agreement; or, the principal may “terminate the contract” if the worker breaches the agreement.

Semantics? “Fire” or “Quit” without cause creates no liability in an employment relationship or liability in an IC relationship. “Terminate a contract” due to breach is independent contractor and incurs liability on the beaching party.

About Chris

Chris Schaefer represents small businesses providing preventative law to avoid common traps and mistakes, to make decisions considering alternative risk factors, and to minimize costs and expenses. Chris has vast experience representing businesses which contract with independent contractors with an emphasis on California Employment Development Department Employment Tax Audits. Chris has represented companies as large as AT&T and NEC America and as small as a single photographer.
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