Money & Ethics


Cut Costs With Independent Contractors?

Knight Kiplinger

It's appropriate for a business owner to try to lower prices to customers, but fattening the bottom line at the employees' expense is not ethical.



Q: I recently learned that a very successful competitor -- who always seems to be undercutting my pricing -- employs very few of his staff directly. Most of his work is done by people he defines as independent contractors. (I hear that some of them used to be his employees, but he laid them off and promptly hired them back as "freelancers.") He apparently saves all the money that I pay for my staff's Social Security, unemployment insurance, worker's comp, health care and vacations, not to mention my HR administrative costs. Am I being a chump, or is he unethical?

It is not unethical for a business owner to try to reduce costs and lower prices to his customers, especially if it can be accomplished through efficiency, economies of scale and innovation. That's working smart. But fattening the bottom line at the expense of one's employees is not ethical. The most respected employers offer good benefits to full-time employees.

Maybe your competitor's workers are bona fide independent contractors. If so, in addition to his savings in taxes and benefits, he also enjoys the flexibility of reducing his labor costs without having to lay off real employees.

But your competitor might be one of thousands of employers who are breaking federal law by misclassifying long-term, full-time employees as freelancers and independent contractors. This is the subject of heightened scrutiny by the IRS and the Department of Labor. The IRS has a multipart test for this classification, and it requires a surprisingly high degree of autonomy on the part of these workers. True independent contractors typically work for more than one client at a time, set their own hours, and don't receive training or close supervision from their clients.

In addition to the risk of government audits, employers who don't heed the accepted rules of independent contracting could be vulnerable to whistle-blowing by disgruntled workers and former employees.



Get Money & Ethics by e-mail for FREE. Registered users on Kiplinger.com can sign up to receive more than 20 valuable updates. Register Now »

Editor's Picks From Kiplinger


More Sponsored Links


DISCUSS

Permission to post your comment is assumed when you submit it. The name you provide will be used to identify your post, and NOT your e-mail address. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic.
View our full privacy policy


Advertisement

Market Update

Advertisement

Featured Videos From Kiplinger