Why Should a Founder Care?
How you structure your workforce will greatly impact the value and strength of your company and understanding the difference between an employee and an independent contractor will help you understand the proper workforce model for your startup. Also understanding the issues involved may help you to avoid costly mistakes that could cost you a lot by not having the proper contracts in place to protect your intellectual property ownership and rights. A misstep here could be massive.
What is an Independent Contractor?
An independent contractor is a service provider who is regularly and customarily engaged in an independently established trade separate and apart from the services that independent contractor provides for your company. An independently established trade is one that is created and exists apart from a relationship with a particular employer and does not depend on a relationship with any one employer for its continued existence. See Utah Admin. Code R994-204-303(1)(a).
Why You Would Want to Hire Independent Contractors
- Less potential liability for actions of an independent contractor.
- Avoid paying employment tax, unemployment withholding, and worker's compensation insurance for that service provider.
- More flexible workforce and less red tape in severing relationships with independent contractors.
Why You Would Want to Hire Employees
- More control over hours, location, and manner of performing work.
- Utah is an "at will" state which means that you are able to terminate an employee at any time; whereas the independent contractor's contract will likely have detailed provisions on termination of the relationship.
- Employer's automatically own copyright and other intellectual property rights for works prepared by employee's for the employer; whereas a "work-made-for-hire" clause needs to be in an independent contractor agreement to ensure intellectual property ownership of an independent contractor's work flows up to the employer.
- An employer may have more liability if an independent contractor is injured on the job, whereas an employee is going to be covered by worker's compensation insurance.
What if I Don't Have a Contract that Establishes Whether a Service Provider Is an Employee or Independent Contractor?
In Utah, it is presumed that persons who perform services for a company are employees. Utah Code Ann. § 35A-4-204(3). So you really should have a contract if you want a stronger chance to support that your service providers are independent contractors.
How do Courts Determine Whether a Service Provider Is an Independent Contractor?
To establish that an individual is an independent contractor, the employer bears the burden to show both of the following: (a) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the contract of hire for services; and (b) the individual has been and will continue to be free from control or direction over the means of performance of those services, both under the individual’s contract of hire and in fact. See Utah Code Ann. § 35A-4-204(3)(a), (b) (emphasis added).
What Are the Factors a Court Considers in Determining Whether a Service Provider Is an Independent Contractor?
The Department of Workforce Services has created a list of factors to be used as aids in the analysis of whether a services provider is an independent contractor. The factors are whether the worker (1) maintains a separate place of business, (2) provides his or her own tools and equipment, (3) has clients other than the employing entity, (4) has the potential for either profit or loss, (5) advertises, (6) has or requires professional or other licenses to engage in the particular business, and (7) maintains business records and tax forms. See Utah Admin. Code R994-204-303(1)(b)(i)–(vii).
Understanding the nuances of independent contractors and employees will help a founder best plan for growth, liability protection, and intellectual property ownership of their company.