What is an independent contractor?
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In the last month or so, the Bermuda Government Throne Speech 2020 indicated that the Bermuda Employment Act 2000 would be upgraded significantly for the first time in almost 20 years.
On November 28, the Government illuminated specific changes to the Act for employers and employees, but left focus on clarification of independent contractor classification to “guidance from the labour relations manager”.
So, what is an independent contractor?
We are not privy to the independent contractor guidance, so will approach this universal category, generically.
An IC, as this business shall be known, is a unique entity. Labelled as a sole trader, or a sole proprietor, generally unincorporated, an individual can enter the business world needing very little to start up and appearing to have no encumbrances.
The construction industry (where Moneywise had numerous clients) refers to ICs as pick-up builders, as in buy or lease a truck, assemble your tools in cargo bed, print up a DBA (doing business as) business card and wow, you are an owner, ready for serious ventures.
In effect you have hired yourself, you are both your own employee and your employer, since there is only you. This is an important concept as we shall see.
Think about it! Your new business, funded by you, self-employed, responsible you (and no one else), independent decision making, setting your own hours, sink or swim by your own efforts, you are in control.
It is an exciting powerful concept. And it works.
Millions and millions of tiny one-person independent contractors have initially used the same format, successfully. You know them, numerous global giant corporations that started their successes as single entrepreneurs in a garage, a studio, kitchen table: Amazon, Yankee Candle, Harley Davidson, Maglite, Under Armour, etc.
Tax authorities, in defining who, what, when, why and how taxes are assessed, delineate numerous differences between ICs and employees. The three major categories are: control, benefits and responsibility (liability).
WHO HAS CONTROL OF YOUR ACTIONS?
The differences between employee and independent contractor control of their work environment and decision making can be clear cut or ambivalent, depending upon where and what type of industry. Real estate agents, taxi drivers, and now UBER drivers operate in a “flexible” environment, so to speak.
As an employee, your employer (company, etc) is in control of your time at work: where you report at required hours every day, take set instructions from management, submit completed tasks, participate in required group meetings, are provided a contract, an employee handbook, benefits, a rate-set salary, and so on.
Problems arise when an employee tries to, say, publish work independently that was done on, and paid for, on company time, or regrettably, has an accident in a company-owned vehicle. In the first instance, the company owns that manuscript, and the second, the company is liable, generally.
As independent contractor you are solely in control, everything is your decision, you use your own equipment, vehicle, you set your own work hours, you bill your own time, you contract for a specific project at a predetermined price. Generally, you have multiple customers.
WHO PAYS FOR WHAT BENEFITS?
Employees receive numerous benefits; the cost generally split between employee and employer for some, while others are completely covered by the employer. Independent contractors foot the entire bill for all benefits. Click on “Related Media” to see the Wage Benefit Cost Comparison Between Employees and Independent Contractors PDF.
Typically then what will ensue is that the IC carries the most common benefits at 100 per cent of cost, because as stated above the IC is both an employer and an employee.
The more popular fringe benefits such as family vacations, professional development, gym/counselling, and so on are basically ignored – as cost is derived from operating profits. Vacations and leave are almost never taken – because when an IC does not work, no income is received.
Additionally, the benefits paid out of the IC pocket, must be computed as major factor overhead when pricing projects. Health insurance alone will run $2,500 to $3,000 for a local family of two parents and two children, that equals $30,000 to $36,000 a year.
It is that simple.
EXAMPLE of benefit total costs paid by the Independent Contractor:
• Health insurance – 100 per cent
• Taxes – 100 per cent
• Social insurance – 100 per cent
• Pension – 100 per cent
• Meals – 100 per cent
• Vehicle/transportation – 100 per cent
• Life insurance – 100 per cent
• Disability insurance – 100 per cent
WHO HAS RESPONSIBILITY AND LIABILITY INCURRED ON THE JOB?
Employee responsibility/liability is generally covered by the employer blanket – but caveat, generally is not everything. Irresponsibility is not tolerated and can be grounds for dismissal. Liability coverage is also generally attached to strict definitions in the governing contract of employee behaviour, financial conduct, and relationships within the company and the employer.
LIABILITY IS LARGEST, MOST CONCERNING DIFFERENCE for independent contractors.
•IC is responsible for everything financial, legal
•Taxation may be higher
•Sole proprietor is extremely vulnerable to lawsuits
•Personal property and other assets may be attached
•Must have very comprehensive liability insurance
There is a price to pay for success, however, when being a one-person operation becomes unsustainable in its present format.
Many business owners find that they do not, and/or cannot remain sole traders (IC).
These three imposing criteria listed above are probably the biggest reason IC’S incorporate their businesses.
There are numerous other reasons, some greatly positive, others purely protective:
•personal cash infusion limits,
•avoiding use of personal assets as collateral,
•inability to secure capital funding without a corporate structure,
•no asset protection,
•additional expertise required for progress implementation,
•personal responsible for debts and lawsuits, including employee lawsuits, yes IC’s do hire personnel,
•no automatic business shelf life if owner dies,
•inability to sell out at retirement.
Martha Harris Myron, CPA JSM, a native Bermudian, is author of The Bermuda Islander Fundamental Financial Planning Primers: Books 1-8 with all specifically focused on Bermuda financial and economic matters, international financial consultant to the Olderhood Group Ltd Bermuda, and financial columnist (since 2000) to The Royal Gazette, Bermuda. All proceeds from these articles are donated by The Royal Gazette to the Salvation Army, Bermuda.