Q: I recently learned that a very successful competitor -- who always seems to be undercutting my pricing -- employs very few of his staff directly. Most of his work is done by people he defines as independent contractors. (I hear that some of them used to be his employees, but he laid them off and promptly hired them back as "freelancers.") He apparently saves all the money that I pay for my staff's Social Security, unemployment insurance, worker's comp, health care and vacations, not to mention my HR administrative costs. Am I being a chump, or is he unethical?
It is not unethical for a business owner to try to reduce costs and lower prices to his customers, especially if it can be accomplished through efficiency, economies of scale and innovation. That's working smart. But fattening the bottom line at the expense of one's employees is not ethical. The most respected employers offer good benefits to full-time employees.
Maybe your competitor's workers are bona fide independent contractors. If so, in addition to his savings in taxes and benefits, he also enjoys the flexibility of reducing his labor costs without having to lay off real employees.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But your competitor might be one of thousands of employers who are breaking federal law by misclassifying long-term, full-time employees as freelancers and independent contractors. This is the subject of heightened scrutiny by the IRS and the Department of Labor. The IRS has a multipart test for this classification, and it requires a surprisingly high degree of autonomy on the part of these workers. True independent contractors typically work for more than one client at a time, set their own hours, and don't receive training or close supervision from their clients.
In addition to the risk of government audits, employers who don't heed the accepted rules of independent contracting could be vulnerable to whistle-blowing by disgruntled workers and former employees.
-
AI Heads to WashingtonThe Kiplinger Letter There’s big opportunity for AI tools that analyze MRIs and other medical images. But also big challenges that clinicians and companies will have to overcome.
-
Ask the Editor: Questions on Amended Returns and PropertyAsk the Editor: Taxes, April 18, 2025 — Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on amended returns, property and deductions.
-
Airbnb Host Tells What It's LikeBusiness Costs & Regulation This Denver pharmacist began booking her ski condo a few months after the pandemic hit.
-
Tough Times for a Family BusinessBusiness Costs & Regulation His dry-cleaning operation was rocked by the pandemic, but he is staying optimistic.
-
IRS Gives Truckers a Tax Break in Response to the Colonial Pipeline ShutdownTax Breaks The tax penalty for using dyed diesel fuel for highway use is temporarily suspended.
-
Reliving a Harlem RenaissanceBusiness Costs & Regulation After a tough winter, two sisters look forward to reviving their restaurant’s business.
-
Add a VPN to Surf the Internet SafelyTechnology To help you fight identity theft, consider adding a VPN.
-
Stephanie Creary: Making the Case for Diversity on Corporate BoardsBusiness Costs & Regulation Adding underrepresented voices can improve a company’s bottom line.
-
How We Lose When We Overlook Black TalentBusiness Executives Comments from Wells Fargo CEO Charles Scharf (pictured) reflect a culture that tramples on clients’ trust and limits opportunities for people of color.
-
Retirees, Create An Emergency Fund for Rental PropertyBusiness Costs & Regulation Build a cushion to protect your income from an unforeseen crisis.
