Companies use a variety of people to accomplish all the work they need to be done, and consultants commonly make a contribution, which can bring about unique advantages, limitations, and purposes. Though consultants work closely with companies, they are not official employees of these organizations. This is an important distinction for insurance, legal, and HR purposes.
It is important to understand the various classifications of workers. When it comes to employees versus consultants, there is a vast difference that includes legal and financial implications.
Consultants vs. Employees
Employees work for a company directly. They are considered part of an organization, and their actions are legally considered actions of the company itself. Employees are paid from a business’s payroll and are entitled to certain protections under state and federal labor laws such as breaks and lunches.
Consultants provide services to a company, but they don’t work directly for it. Typically, consultants are either part of a consulting firm or are their own incorporated businesses. Employers pay the consulting business, not the individual consultant. Consultants are contracted for specific projects and tasks. Although some get more involved, a consultant’s primary purpose is to evaluate and advise. Client organizations can then decide whether to take advantage of consultants’ expert opinions and suggestions.
The Consulting Relationship
Consultants do not act as an entity of a company and their work does not constitute authorized action of their clients. It is actually common for consulting agreements to include clauses to separate the ownership of intellectual property to divide a consultant’s ideas from clients’ proprietary concepts and methods. Although consultants have a duty to work in their clients’ interests for the duration of a specified project or job, their relationships are limited. They sometimes even do work for their clients’ competitors. Likewise, organizations have no obligation to use a consultant’s services and may even terminate a project at any given notice if they are unhappy with the services or decide they are no longer helpful or cost-effective.
Consultants are often hired to assist staff while saving the costs of hiring a full-time employee. Consultants are experts in their field and are paid to share their knowledge and expertise in efforts to resolve issues and accomplish goals. While there are great reasons for hiring consultants instead of employees, not being extremely clear on the difference and following protocol brings about many liabilities.
In the United States, if the IRS determines that a consultant’s relationship to a client qualifies as an employer-employee relationship, the client is responsible for the employer’s portion of Social Security and Medicare taxes for the period the consultant’s services were used. It is also essential the client contributes to unemployment compensation and holds workers’ compensation insurance. If the IRS cannot clearly identify whether the consultant paid income taxes on the money paid to the consultant, the client could also be held responsible for paying those taxes.
About World Wide Specialty Programs
For the last 50 years, World Wide Specialty Programs has dedicated itself to providing the optimal products and solutions for the staffing industry. As the only insurance firm to be an ASA commercial liability partner, we are committed to that partnership and committed to using our knowledge of the industry to provide staffing firms with the best possible coverage. For more information about Staffing Professional Liability Insurance or any other coverage, we have available to protect your staffing business, give us a call at (800) 245-9653 to speak with one of our representatives.