Engaging an independent contractor instead of hiring an employee can save costs.

The IRS plans to audit at random 2,000 companies for each of the next 3 years, beginning in February 2010 - to determine compliance with workers classifications and employment tax rules.  Carefully analyze your independent contractor arrangements, paying particular attention to your right to control his or her actions.

It can also multiply costs if done wrong.  Misclassifying an employee as an independent contractor can cause a host of liability issues–back overtime pay, federal and state taxes, FICA contributions, penalties from the IRS, and exposure for workers' compensation, unemployment, and federal discrimination claims.

From time to time, courts give employers pointed reminders that simply calling someone an "independent contractor" does not make it so.

In January, the North Carolina Court of Appeals considered the situation of a trucking company that leased a truck to a third party and contracted with a driver to run the third party's trucking routes.  The driver had to qualify with the third party under its driver training program, including its physical fitness test and its rules and regulations.  As the court found, the third party had "exclusive control, possession, and use" over the company's truck and directed where and when the driver would make runs.  The trucking company arranged with the driver to pay him a flat fee per mile based on the job assigned by the third party.

The court, however, found sufficient control by the trucking company to make the driver its employee instead of its independent contractor.  It could refuse an assignment from the third party (although the court did not find it ever did so).  It required the driver to report the truck's condition and to bring the truck in for repairs.  It held the accident insurance policy for his driving.  It paid for his gas.  Ultimately, it had a right to end the relationship with the driver.

On this basis, the court found the trucking company employed the driver, owed him workers' compensation coverage, and was responsible for benefits owed to him following an accident–proving that improper classification as a contractor can be costly.