Academic journal article Journal of Small Business Management

Determinants of Independent Contractor Status: Outcomes of U.S. Court Cases

Academic journal article Journal of Small Business Management

Determinants of Independent Contractor Status: Outcomes of U.S. Court Cases

Article excerpt

Attracting human resources with the specialized qualifications needed to compete in the global economy is essential for small business success. However, research on small businesses has noted that staffing is one of the biggest problems facing them (Deshpande and Golhar 1994). Lacking extensive financial resources, small and even medium-sized businesses may experience difficulty competing with larger organizations in terms of the compensation and fringe benefit offerings needed to attract qualified full-time, permanent employees. Contingent workers provide a cost-effective staffing alternative.

Numerous recent corporate downsizings in the United States, coupled with events such as the demise of communism in Eastern Europe and high unemployment rates across Europe, have resulted in many talented individuals finding themselves seeking contingent employment (Templeman 1996). European laws have traditionally given permanent employees a great deal of job security. Because of these laws, employers faced with economic uncertainties are turning to using part-time or short-term contract labor more and more often. Currently, one in five workers in France is on a temporary or part-time contract; seven out of ten new jobs created in Spain last year were temporary; in Britain, more than 30 percent of the workforce is part-time or temporary; and in Germany, the ban on private temporary staffing agencies has been removed (Templeman 1996). The temporary and part-time contract approach to staffing greatly reduces the legal requirements and costs imposed on companies in Europe who terminate or layoff workers.

One frequently used group of contingent workers is independent contractors (ICs). U.S. Bureau of Labor statistics indicate that there are more than eight million ICs in the U.S. alone. That number is expected to double in the next ten years (Fishman 1997). Independent contractors are, in general terms, individuals who enter into a relationship with an organization to perform some function needed by the organization. The independent contractor typically provides his/her own tools or other equipment and has a great deal of latitude in how the project is accomplished. Consequently, the IC is not legally considered an employee.

In the past, companies hired ICs to perform special projects. Now, while still used for these purposes, ICs are also being used in strategic positions throughout organizations. The use of ICs in strategic roles is especially beneficial to small and medium-sized businesses that cannot afford the costs of permanently employing individuals for specialized functions. For instance, an attorney specializing in international trade could be engaged by a small business as an independent contractor to provide international legal advice. Because the attorney does not become a permanent part of the payroll, this staffing approach is much more affordable for a small business desiring to engage in international commerce.

Small businesses have frequently reported that the use of ICs does result in cost savings (Gray 1995). These savings advantages include avoiding employment taxes, reducing bookkeeping and payroll preparation costs, reducing fringe benefits, eliminating worker's compensation benefits, reducing capital and maintenance costs (if the ICs are required to furnish their own equipment), eliminating overtime pay, and decreasing administrative burdens (Bureau of National Affairs [BNA] 1994; Stalnaker 1993). Stalnaker (1993) notes that these advantages can result in as much as a 40 percent savings in labor-related costs for employers. ICs may actually be paid more per hour than employees, but by not being paid other employee-related expenses, ICs actually cost firms less than employees (Nolo 1997).

Further, the small business utilizing the services of an IC avoids many of the typical human resource management issues associated with employees. For instance, if the employer is using ICs, wrongful discharge and discrimination lawsuits are not an issue as they may be with employees (BNA 1994). …

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