True Independent Contractors Have An Opportunity for Profit and Loss

Posted: December 10, 2015

Companies need to take care when classifying those who provide services as independent contractors or employees.  Government agencies who care about the classification (for example, the DOL considering whether unemployment insurance payments are warranted, or Workers’ Compensation determining whether a claim is valid, or the applicable fair employment practices agency determining whether to dismiss a discrimination claim), will look at a number of factors to answer the question of whether the person was properly classified.  Should a business designate an individual as a contractor, and that person then make a claim asserting they were an employee, the agency will not just take the company’s statement that they were paid on a 1099 and so are not eligible for whatever the employee is seeking.  Rather, the agency will evaluate many aspects of the relationship to determine what it actually was as a matter of law.

One thing the agency will consider is the alleged contractor’s opportunities for profit and loss.  In other words, who bears the burden if the job takes longer and/or costs more than originally anticipated.

When the contactor gave a price for the job – it is an hourly rate, plus expenses? Plus other costs?  A true contractor provides one overarching price for the work, and then takes the liability of having priced it wrong.

Anyone who’s ever had to cut a client bill, or done something over for free knows who had the liability for profit or loss on that project – you did.

Employees are paid by the hour, or by their salary, whether they do a good job or no.  If they have out of pocket expenses, their employer pays them.  An employer pays for employees to attend conferences and continuing education opportunities.

Independent contractors have their own business expenses and need to cover their budget based on what they determined to charge their customers.  When they get it wrong, the contractor is the one who has the liability for the loss—not just for the profit.

If a service provider is getting paid without regard to the quality of the service being delivered, and gets paid for every hour without regard for how long it might take, that provider is more likely to be an employee than a contractor.