Working as a Contractor? Make Sure You’re Protected

Photo: Tim Patterson

In today’s tough employment market, many job hunters would welcome any paying offer of work. But if you’re one of the millions of American workers who’ve entered the world of freelance or contract work status in recent years, you should know about the risks you are taking on.

From 2005 to 2010, 4 million U.S. workers became independent contractors, according to Economic Modeling Specialists Inc., a company that analyzes federal employment data. These contractors range from full-time software developers who report to an office each day to freelance writers who work from home for multiple clients. But unlike traditional employees who can rely on a raft of federal workplace protections if something goes wrong on the job, contract workers often have little recourse.

Donna Ballman

“If you’re an employee, you’re covered by discrimination, minimum wage, overtime, whistleblower and other laws,” said Donna Ballman, an employment lawyer with Donna M. Ballman PA in Florida. “If you’re a contractor, you may be giving up these rights.”

To protect yourself at work – and from the Internal Revenue Service when tax day rolls around – you should know what you’re getting into before accepting an independent contract job.

In addition to giving up workplace protections, independent contractors take on an extra tax burden, Ballman said. A single person earning $50,000 a year would pay about $4,325 in federal taxes at a traditional job, and about $7,065 as a contractor, according to H&R Block’s online tax calculators. State and local taxes could be even higher.

 “As a contractor, you’ll pay both halves of your Social Security and Medicare taxes,” Ballman said. “If you’re an employee, the employer pays half. This is a big chunk of pay to give up.”

That’s not to say that contract work is always a losing proposition.

“If you are creating art, written work, computer programs or other creative works, then it may be an advantage to you to be an independent contractor,” Ballman said. “However, if the contract says the work you are creating belongs to the company, you are probably giving up one of the main advantages to being a contractor. You might be accidentally giving up rights you shouldn’t.”

Your employer may also be skirting the law by hiring you as a contract worker, depending on the details of the job.

Companies often classify people as independent contractors who really should be regarded as employees, said Mike Strauss, an employment litigation attorney with Palay Law Firm in California.

The IRS publishes guidelines that employers should use when classifying workers – and that contractors can review to make sure they’re being treated fairly. If you report to the same workplace for a fixed number of hours each day, and you use your employer’s equipment to do the job, odds are good that you should not be classified as a contractor, Strauss said.

“If you’re stuck in a situation like that, keep records of what’s going on,” Strauss said. “How many hours are you actually working, what the the day-to-day conditions of your job are. It doesn’t need  to be a full journal, but keep notes: today I worked 15 hours, today I was in the office from 9 to 5. The better the record you’re keeping, the more able you are to prove a case.”

Mike Strauss

If you’re happy at work and don’t want to rock the boat, those records can act as insurance against future conflicts.

If you want to change what your employer is doing, you have a range of options, Strauss said: You can start by just raising the issue with your boss or human resources department – “Hi guys, I think you’re classifying me incorrectly,” you can hire an attorney, or you can report your company. Depending on where you work, your state’s labor department, workers compensation program or unemployment office may want to crack down. At a federal level, the Internal Revenue Service and U.S. Department of Labor are increasingly investigating violations of the law.

Too often, contractors wait until they feel victimized to take action, perhaps because they were not paid overtime for long hours or because they did not get a pay check at all, or because they want to receive unemployment benefits after a layoff.

“You need to prove you’re an employee to get unemployment if the relationship ends, or to work with an employer to recover overtime wages if you’re not paid,” Strauss said.

An employment lawyer can help you challenge your “independent contractor” status in that situation. And even if you believe you’re correctly classified, it may be a good idea to talk to a lawyer when you begin working as an independent contractor, just to be certain that you understand the upsides and risks of life as your own boss.