Consultants Versus Employees: What You Need to Know
When economic times are tough, there is usually an increase in the number of consultants used in architectural and engineering firms, as well as in construction companies. The “consultants”referred to in this article are the ones that may have been employees of the firm in better economic times. This is in contrast with other types of consultants who have specialties and work on projects, such as MEP engineers. Labeling these individuals as “consultants” allows the company to continue working with those individuals in a fashion that is less expensive for the company, but may be more expensive for the individual.
The biggest area of savings for the company is generally in the insurance category. The company no longer has to be concerned about health insurance or workers compensation. As a “consultant”, the individual has his own business and may decide whether or not to incur those expenses. Self-employed business owner also generally do not need to carry worker’s compensation insurance if they do not have employees. Of course the laws on this topic vary from state to state, so be sure to check on those in your area.
The companies may also be able to cut down on overhead, since consultants do not work 9 to 5 or need to work out of their offices. Instead, they may perform their services out of their own homes, at the job site or in some other location. There are many consultants who spend most of their days with a laptop in a coffee shop.
What can happen in these relationships is that while the consultant is being called a “consultant”, he or she “looks” just like an employee, “acts” like an employee and is “treated” by the company like an employee. This can create problems.
As a construction attorney, I am frequently consulted by companies about having consultants and by consultants about being consultants. An “employee” is someone who works full-time, at least 40 hours a week usually, and usually has benefits, such as paid vacations, holidays off and insurance. The employer withholds taxes and pays social security to the government for the employee. Employees report to an office each day, use the firm’s equipment and supplies and are given tasks to work on by their employer. The work they do is owned by the employer.
The problems in this area come about when someone is called a “consultant” by the company, but they are really an employee. The company is their only “client”. In such situations, the “consultants” must then pay their own estimated taxes, as would any business owner; however, some do and some do not. They would have the right to take deductions for business expenses, as would any business owner. They should have their own insurance, but some do and some don’t. Consider this, if an architectural or engineering firm turns former employees into “consultants” and those individuals cannot afford to carry errors and omissions insurance, what happens in the event of a lawsuit ? The company may have its own policy, but the consultant may not have any coverage and can be sued separately from the company. In addition, if they are working exclusively for the company and an audit is done by the government, the individual would probably be deemed an employee and the company may have a problem with not having paid taxes and social security for them or having workers compensation.
In order to eliminate any confusion, the parties should be clear about their roles and stick to them. If they are truly consultants, they should be set up and function as separate businesses. If they are employees, they should be treated as such. If they are consultants, they should have a contract for services with appropriate provisions drafted by an attorney knowledgeable in this area. I will discuss this in a future article. Thus will do a lot towards eliminating problems in the future.