Contract labor usually involves a company hiring an outside party to execute the labor for a particular business project. For instance, the company may have laid the plans for the production of a particular product. They may have all the materials and blueprints, but simply need a workforce in order to actually construct and package the product. A company will usually hire contract labor in order to save on costs.
Contract labor therefore involves the contracting of a large group of workers, often for a one-time job or for seasonal labor. It generally involves the use of a labor contract. This is a legal document outlining the terms of the labor agreement. These may include the projected time of completion, project costs, payment and reimbursements.
For tax purposes, the definition of a contract worker is very strict according to IRS definitions. The definition has more to do with the amount of control exercised by the employer over the worker’s labor, not the way that they are paid. In general, more control exercised by the employer, the more that the worker will be considered a regular employee and not a contract worker.
The classification of employees and contract workers is very important. It could spell out different reporting and salary requirements for the company. Thus, the contract should be very specific as to the classification of the employee for tax purposes.
Contract labor arrangements may be entered into in order to:
- Avoid taxes
- Complete a specific project
- Provide temporary, transitional job opportunities for unemployed persons who are seeking income
The main purpose of most contract labor arrangements is for the business to reduce costs. The contract labor may sometimes be provided by a temp agency that specializes in providing companies with temporary workers.
A business will usually hire contract labor when:
- The company workforce doesn’t have the appropriate skill set to complete the desired task
- The company aims to save on costs; it may be cheaper to hire outside labor, especially one-time or seasonal work. For instance, most contract laborers aren’t entitled to regular employee benefits like retirement or paid vacation
- Tax consequences are in consideration- the company may not be required to withhold taxes from the temporary worker’s pay; this can also save on costs
When handling contract labor arrangements, it is important to consider the various legal issues that can be involved. These may include immigration law issues, such as alien labor certification and documentation. The company should also consider age-related issues like child labor laws, age discrimination policies, and retirement laws.
Finally, some contract labor agreements may include a non-litigation clause, which states that the parties won’t file a lawsuit in the event of a dispute, but rather will seek a settlement or arbitration. Such clauses can severely limit the legal options for both parties, and should only be entered into after considering the full effects of the clause.
Contract labor is a very common aspect of both large and small businesses. However, contract labor and labor contracts can often become very complex, even for smaller business projects. It will be in your best interests to hire a contract lawyer when dealing with contract labor laws. Your attorney can explain your rights under current state and IRS laws, and will be able to represent you in court if you need to submit a legal claim.