The Cost of Converting Independent Contractors to Employees

October 6, 2015

While Uber may be receiving the lion’s share of the attention on the topic, there has been no shortage of court rulings, IRS audits, and labor decisions on the issue of workforce misclassification. With a noticeable shift towards government agencies determining certain personnel are employees, it has made it increasingly difficult for employers to feel comfortable classifying a worker as an independent contractor, even when it appears to be the correct decision. This has caused many employers to revisit their corporate policies concerning the treatment of independent contractors, sometimes resulting in the conversion of the employer’s workforce.

Employers can choose to be proactive or reactive when dealing with these workforce decisions. Reactive employers that are subject to dealing with audits and wage claims, while the proactive ones conduct an in depth financial and practical analysis of converting its independent contractors to employees. Being proactive will lessen the scrutiny of the Federal and State agencies, but employers are often surprised by the added costs of hiring and maintaining employees.

Below are some costs that employers can expect to incur when implementing a conversion from contractors to employees.

Minimum Wage

One of the biggest employer shifts from contractor to employee is the actual pay to the worker. Contractors are easy; the employer agrees to pay the contractor a set amount over a set period with little opportunity for problems to arise. Conversely, there are many payment considerations surrounding employees, the least of which is assuring that employees receive minimum wage.

Employers must pay employees minimum wage for all compensable time. This rule applies to both hourly and salaried employees. While many employers do not consider this to be a major concern, employers should remember that it must pay minimum wage for all hours on the job, such as travel and training time.

Generally speaking, when an employee is required to travel for work, that time is compensable. This includes time spent driving, or as a passenger on an airplane, train, bus, taxi, or car, in traveling to and from an out of town event, and time spent waiting to purchase a ticket, check baggage, or get on board, is compensable. It’s easy to see how these hours can quickly add up. Time spent training is compensable unless the activity is voluntary, it occurs outside of regular work hours, it is not directly related to the employee’s job, and no productive work is performed during the activity. Depending on the type of work required by the employee, employees that travel or require extensive training can create major havoc to an employer’s bottom line.

Breaks and Overtime

Lunch breaks, rest breaks, and overtime are another major consideration for employers. In California, an employee is entitled to a meal period of at least 30 minutes after working five hours (unless the total work period is no more than six hours) and is entitled to a second meal period of not less than 30 minutes if the employee works for more than 10 hours (unless the total hours are under 12). The meal period may be waived, but such waiver must be in writing by mutual consent of both the employer and the employee. Merely providing a lunch break may not be enough, as employers must also follow specific rules for how the meal break is provided.

Employers must authorize and permit a 10 minute paid rest period for every four hours worked or major fraction thereof. If employers do not authorize or permit a rest period, it will be obligated to pay the employee one hour of pay at the employee’s regular rate of pay for each workday that the rest period is not provided. Either way, rest periods are compensable time for employees.

If classified as nonexempt employees, it is possible that such employees may incur and be entitled to overtime pay. This pay is 1.5 times the employee’s regular pay for all hours worked in excess of eight hours in a day or 40 hours in a week, and double the employee’s regular pay for all hours worked in excess of 12 hours in a day. The increased pay is not the only issue for employers surrounding overtime pay, as there can also be added time costs of determining who qualifies for overtime pay and monitoring employees to ensure they are working under the overtime threshold, if employer preferred.

Employee Expenses

A major shift for employers when dealing with employees as opposed to contractors is the requirement for employers to pay for employee expenses. Most contractors will be required to pay for their own expenses, but employees are the opposite.

Employee expenses can add up quickly with items such as meals and lodging, travel expenses, and equipment and tools. Depending on the type of business, workers that frequently travel or workers that require expensive equipment and tools to do their job are going to create major financial strain for employers. The requirement that employers must pay or reimburse employee expenses is liberally construed, so employers can plan on covering many costs it may not have expected to cover.

There have been recent legal opinions that equipment costs, such as the costs associated with cell phones used for both personal and business use, must be reimbursed by an employer. This was the case even where the use of the cell phone had no real marginal costs, especially in the age of unlimited minutes. This trend could stretch beyond cell phones so employers should be wary of the tools and equipment employees require in performing their job.

Health Care and Employee Benefits

Employers are required to provide health insurance coverage if it has at least 50 full-time employees or equivalents. For these employers, the analysis doesn’t stop there, as additional time and money is spent selecting the right health care plan and navigating the complex health care laws. Problems can also arise for employers with less than 50 employees, because although they may not be legally responsible for providing health care, these employers could experience issues with employee retention if an employee’s expectation is to receive health benefits.

Some states have mandated paid sick leave for employees. For example, the minimum requirement for paid sick leave is 24 hours in California, which can cause its own problems in terms of having to pay a second employee to cover the sick employee. As with health care, employees may expect other benefits such as vacation and holiday pay, personal days, and retirement contribution. While these employee benefits may not be required, making employees happy drastically helps retention and reduces the cost of having to find and train new employees.

Insurance and Other Costs

There are many other new expenses that an employer is going to encounter when converting its workforce to employees. Items such as payroll taxes, workers compensation insurance, and general liability insurance, to name a few, will all come into play with employees in the mix. These expenses can vary greatly depending on the type of work of the employer, so when possible, an employers should obtain quotes early in the decision making process of pursuing an employee conversion. Take Uber for example. In addition to the standard insurance required just for having employees, it would have to consider whether auto insurance for the drivers was prohibitive enough to necessitate change to its current business model.

Conclusion

The heavy focus on workforce misclassification has caused many employers to think twice about continuing to label certain personnel as independent contractors. One way to bypass this concern is by converting the contractors to employees, but as you can see, this is no easy task. While the items discussed above will apply to most employers, each employer still presents a different set of facts, making the conversion analysis case specific. Proactivity is key and employers should begin determining the costs associated with converting its contractors to employees as soon as possible, taking into consideration whether the conversion makes sense from both a financial and practical perspective.

Matthew Staub

By

Matthew J. Staub is an attorney with experience in business, taxation, trusts and estates, and business succession planning. Mr. Staub has represented a wide range of businesses against the Internal Revenue Service and Franchise Tax Board, as well as provided estate and succession planning for business owners. Prior to practicing law, Mr. Staub attended the Kelley School of Business at Indiana University, where he majored in accounting and entrepreneurship. While his background in accounting drove his interest in tax, his foundation in entrepreneurship is what attracted him to Pasha Law. Mr. Staub also attended the University of the Pacific, McGeorge School of Law, where he received a taxation specialization. During that time, he spent multiple years running the Volunteer Income Tax Assistance group and representing taxpayers against the Franchise Tax Board through the Tax Appeals Assistance Program. Mr. Staub is active in the San Diego community by volunteering his time towards pro bono legal work and sitting on the board of a charitable organization.

Get Business Legal Updates

Please provide your full name.
Please provide a valid email address.
We respect your privacy, and we will never share your information. Unsubscribe at any time.

Related Publications

Through a five-round championship bout, Matt travels to Texas from California to determine which state is better for business. Will it be a knockout with a clear winner or will it go to the scorecards?

July 14, 2021

What are the worst legal mistakes we see made by small businesses? We refer to them as the “Dirty Dozen.” Check out this article and make sure you don’t commit these costly blunders: https://www.pashalaw.com/worst-legal-mistakes-small-business-dirty-dozen/

June 9, 2021

Many of our clients are small businesses, and a common question is whether it’s better to organize as an LLC or an S-Corp. As with many legal questions, the answer is: it depends. We’ve written an article breaking down the ins and outs of S-Corps to help you determine the best option for your tax…

May 6, 2021

We’re sharing various articles with legal tips for small businesses from our blog on our social media to celebrate Small Business Week. Like this one, an advertising legal guide for small business: https://www.pashalaw.com/advertising-marketing-legal-guide-small-business/

May 5, 2021

Running a small business is hard, but we hope to make it just a little easier by clueing you in to some of the biggest legal mistakes that small businesses make, like this one: make sure you are properly classifying your employees. For more insight into the top legal mistakes small businesses make, click here:…

May 3, 2021

In a ruling against Uber, the Massachusetts Supreme Judicial Court has determined that only linking to Terms of Service or terms & conditions on a registration page is not enough to bind users to them. The court found that “Uber’s terms and conditions did not constitute a contract with the plaintiffs,” since Uber did not require…

January 20, 2021

Uber acquires Postmates in their strategy to gain more traction in delivery of food and “everyday goods.” https://pasha.bz/uber-postmates

July 9, 2020

Unless you’ve been living under a rock, you know that the U.S. just underwent one of the most contentious elections in its history. The status of may current and proposed laws is now uncertain as we prepare for the shift in administrations. The country remains on edge as we wait to see how things play…

November 30, 2016

Anyone who’s been paying attention to state and federal politics this 2016 election cycle knows that wage and hour laws have been a big topic in the news.  Much of this focus has been on raising the minimum wage at both federal and state levels, and there’s been a lot of discussion over clarifying the…

May 19, 2016

The politics of minimum wage laws have been very much in the news lately, because, frankly, there has been a lot of news to report, even aside from the calls from the Democratic presidential candidates to increase the minimum wage. It used to be the case that the minimum wage was largely a matter of…

May 5, 2016

For one reason or another, there is a good chance you have heard about mega company Uber before. Perhaps this is because you have used their service when you are in the city and need a ride home. Perhaps it is because, while you have never used them, everyone is always suggesting you “Uber it,”…

April 12, 2016

In case you missed the big news, California Governor Jerry Brown reached a tentative agreement this weekend with labor unions designed to raise the state minimum wage to $15 an hour over the next several years. This is a $5 increase from the current state minimum wage of $10. This makes California the first state…

March 30, 2016
Legally Sound Smart Business cover art

Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
Apple Podcast badge
Google Podcast badge
Spotify Podcast badge

Latest Episodes

October 12, 2021

In our latest episode, Nasir and Matt are covering the legal issues on Social Media. The average person spends most of their day on social media, whether they are scrolling for hours or publishing their own content. However, just because you publish your own content on Instagram does not equate to you owning that image….

September 28, 2021

What is a Non-Disclosure Agreement, and when do I need one? In this episode, Nasir and Matt shares why you need to use Non-Disclosure Agreements, basic facts about NDA’s, and discuss about the infamous Jenner-Woods story. Having the right Non-Disclosure Agreement in place not only protects you and your business, but it also makes the…

July 14, 2021

Through a five-round championship bout, Matt travels to Texas from California to determine which state is better for business. Will it be a knockout with a clear winner or will it go to the scorecards?

June 16, 2021

Covered in this episode of Legally Sound Smart Business are some typical business mistakes blunders small businesses often make and how to avoid them. Blunder #1: Copying and pasting agreements It may sound like a good idea at the time, but this blunder comes with hidden pitfalls. Having an attorney draft terms that are specific…

February 4, 2021

How you terminate an employee can make the difference between a graceful transition to avoidable negative outcomes like a dramatic exit or even a lawsuit. We gathered a panel of experts and asked them – is there a “right way” to fire an employee? We would like to thank our guests for this episode: Amr…

December 2, 2020

The COVID-19 pandemic has turned nearly every aspect of life on its head, and that certainly holds true for the business world. In this episode, Matt and Nasir explain how the early days of the pandemic felt like the Wild West and how the shifting legal playing field left a lot open to interpretation and…

November 16, 2020

After plenty of ups and downs, our buyer has finally closed on the purchase of their business. While we’re marking this down in the ‘wins’ column, it never hurts to review the game tape. In this final episode, our hosts, Matt Staub and Nasir Pasha, return to the deal almost a year later to reflect…

September 15, 2020

The ink is drying on the signature line and things are looking great for our buyer. After so much hard work, the finish line is in sight and the cheering within ear shot.   Though the landlord is still serving friction, things seem safe to move forward and for now, our buyer will be keeping…

July 31, 2020

Though things are coming along well, the journey would not be interesting if it was purely smooth sailing. After our buyer opens escrow, they are forced to push the closing date back when suddenly a letter from an attorney was received claiming the business, we are buying has a trade mark on the name!  Now…

June 12, 2020

With frustration at an all-time high and professionalism at an all-time low, our friend the Buyer has “had it” with the Seller and quite frankly their lack of knowledge. At present our Buyer is rightfully concerned that the latest misstep from our loose-lipped Seller will threaten not only the entire operation of the businesses but…

May 11, 2020

As we go deeper into the buying process, we start to uncover more challenges from our seller and encounter some of the wrenches they are tossing our way. When we last left off in episode three our team was knee deep in due diligence for our buyer, had already penned and signed the Letter of…

April 4, 2020

One word–interloper! When a new mysterious broker enters the transaction and starts to kick up dust, Nasir and Matt take the reins. The seller signed off on the letter of intent (see episode 2), yet this “business broker” serves only friction and challenges by refusing to send financials, whilst demanding more of a firm commitment…

April 4, 2020

Just as most stories and deals start out, everyone is optimistic, idealistic and full of hope for clear skies. It’s a perfect outlook with a perfect setup for the ups and downs yet to come. Peek further behind the curtain and into the first steps of buying a business: the letter of intent. After the…

April 4, 2020

When a savvy buyer hears opportunity knocking to purchase a prime positioned business, she decides not to go it alone and taps in the professionals to help navigate what could potentially be a fruitful acquisition. “Behind the Buy” is a truly rare and exclusive peak into the actual process, dangers, pitfalls and achievements, that can…

August 7, 2019

GrubHub is subject to two “matters of controversy” that have likely become common knowledge to business owners: “fake” orders and unfriendly microsites.

May 28, 2019

In this podcast episode, Matt and Nasir breakdown the legal issues of the subscription industry’s business on the internet. Resources A good 50-state survey for data breach notifications as of July 2018. California Auto-Renewal Law (July 2018) Privacy Policies Law by State Why Users of Ashley Madison May Not Sue for Data Breach [e210] Ultimate…

March 12, 2019

In recording this episode’s topic on the business buying process, Matt’s metaphor, in comparing the process to getting married probably went too far, but they do resemble one another. Listen to the episode for legal advice on buying a business.

December 3, 2018

Nasir and Matt return to discuss the different options available to companies looking to raise funds through general solicitation and crowdfunding. They discuss the rules associated with the various offerings under SEC regulations and state laws, as well as more informal arrangements. The two also discuss the intriguing story about a couple who raised over…

July 24, 2018

Flight Sim Labs, a software add-on creator for flight simulators, stepped into a PR disaster and possibly some substantial legal issues when it allegedly included a Trojan horse of sorts as malware to combat pirating of its $100 Airbus A320 software. The hidden test.exe file triggered anti-virus software for good reason as it was actually…

April 17, 2018

Attorneys Matt Staub and Nasir Pasha examine Mark Zuckerberg’s congressional hearings about the state of Facebook. The two also discuss Cambridge Analytica and the series of events that led to the congressional hearings, the former and current versions of Facebook’s Terms of Service, and how businesses should be handling data privacy. Full Podcast Transcript NASIR:…

March 10, 2018

The Trump presidency has led to a major increase in ICE immigration enforcement. It’s critical for business owners to both comply with and know their rights when it comes to an ICE audit or raid. Nasir, Matt, and Pasha Law attorney Karen McConville discuss how businesses can prepare for potential ICE action and how to…

February 5, 2018

New years always bring new laws. Effective January 1, 2018, California has made general contractors jointly liable for the unpaid wages, fringe benefits, and other benefit payments of a subcontractor. Nasir and Matt discuss who the new law applies to and how this affects all tiers in the general contractor-subcontractor relationship. Click here to learn…

January 2, 2018

With a seemingly endless amount of new mattress options becoming available, it is unsurprising that the market has become increasingly aggressive. As companies invest in more innovative solutions to get in front of customers, review sites, blogs and YouTube videos have moved to the forefront of how customers are deciding on their mattresses and how…

December 7, 2017

In recent months explosive amounts of high profile allegations of sexual harassment, assault, and varying acts of inappropriate behavior have transcended every sector of our professional world. With a deluge from Hollywood and politics, and the private workforce, accusations have inundated our feeds and mass media. This harassment watershed has not only been felt within…

November 16, 2017

If you are not familiar with the EB-5 program started in 1990 to give green cards to certain qualified investors in the United States, then you may not have been alone a few years ago. Currently, the EB-5 program has since exploded since its inception and now hits its quotas consistently each year. The program…

October 10, 2017

Government requests come in multiple forms. They can come in as requests for client information or even in the form of investigating your company or your employees. Requests for Client Information General Rule to Follow Without understanding the nuances of criminal and constitutional law and having to cite Supreme Court cases, any government requests for…

August 24, 2017

Nasir and Matt suit up to talk about everything pertaining to employee dress codes. They discuss the Federal laws that govern many rules for employers, as well as state specific nuances in California and other states. The two also emphasize the difficulty in identifyingreligious expression in dress and appearance, how gender-related dress codes have evolved…

June 28, 2017

Nasir and Matt discuss the life cycle of a negative online review. They talk about how businesses should properly respond, how to determine if the review is defamatory, the options available to seek removal of the review, how to identify anonymous reviewers, whether businesses can require clients to agree not to write negative reviews, and…

June 7, 2017

On this episode of the Ultimate Legal Breakdown, Nasir and Mattbreak down social media marketing withguests Tyler Sickmeyer and Kyle Weberof Fidelitas Development. They first discuss contests and promotionsand talk about where social media promotions can go wrong,when businesses are actually running an illegal lottery, and the importance of a soundterms and conditions. Next, they…

April 3, 2017

On this episode of the Ultimate Legal Breakdown, Nasir and Matt go in depth with the subscription box business. They discuss where subscription box companies have gone wrong(4:30), the importance of a specifically tailored terms and conditions(6:30), how to structure return policies (11:45), product liability concerns (14:45),the offensive and defensive side of intellectual property (19:00),…

February 1, 2017

Nasir and Matt discuss the suit against Apple that resultedfrom a car crashed caused by the use of FaceTime while driving. They also discuss howforeseeable use of apps can increase liability for companies. Full Podcast Transcript NASIR: Hi and welcome to Legally Sound Smart Business! I’m Nasir Pasha. MATT: And I’m Matt Staub. Two attorneys…

January 5, 2017

The guys kick in the new year by first discussing Cinnabon’s portrayal of Carrie Fisher as Princess Leia soon after her death, as well as other gaffes involving Prince and David Bowie. They alsotalk about right of publicity claims companies could be held liable for based on using someone’s name or likeness for commercial gain.

December 22, 2016

Nasir and Matt discuss the recent incidentat a Victoria’s Secret store where the store manager kicked out all black women after one black woman was caught shoplifting. They then each present dueling steps businesses should take when employees are accused of harassment.

December 8, 2016

Nasir and Matt return to talk about the different types of clients that may have outstanding invoices and how businesses can convert unpaid bills to getting paid.

November 10, 2016

After a long break, Nasir and Matt are back to discuss a Milwaukee frozen custard stand that is now revising it’s English only policy for employees. The guys also discuss how similar policies could be grounds for discrimination and what employers can do to revise their policies.

October 6, 2016

The guys discuss the new California law that allows actors to request the removal of their date of birth and birthdays on their IMDB page and why they think the law won’t last. They also discuss how age discrimination claims arise for business owner.

September 29, 2016

Nasir and Matt discuss the racial discrimination claims surroundingAirbnb and how it’s handled the situation. They also discuss some practical tips for businesses experiencing similar issues.

September 8, 2016

Nasir and Matt discuss whyAmazon seller accounts are getting suspended and banned without notice and how business owners can rectify this situation through a Corrective Action Plan.

August 25, 2016

Nasir and Matt talk about the accusations surroundingfashion giant Zararipping off the designs of independent artists like Tuesday Bassen and howsmaller companies can battle the industry giants.

August 18, 2016

Nasir and Matt discuss Brave Software’s ad replacing technology that has caught the eye of almost every national newspaper and has a potential copyright infringement claim looming. They also welcome digital marketing expert Matt Michaelree to speak on the specifics of what Brave is attempting to do and whether it has the answers moving forward.

July 28, 2016

Nasir and Matt discuss the sexual harassment lawsuit filed by Gretchen Carlson against Fox CEO Roger Ailes. They also talk aboutthe importance of sexual harassment training and properly handling such allegations in the office.

July 15, 2016

Nasir and Matt talk about the changes at Starbucks that have led to many disgruntled employees and customers.

June 23, 2016

Nasir and Matt discuss the criminal charges facing FedExinvolving the alleged transportation of illegal drugs. They also talk about how business owners should address working with customers that may be breaking the law.

June 15, 2016

The guys return after a long break to discuss why Yahoo is auctioning off over 3,000 patents and how this decision will affect the longevity of the company.

May 25, 2016

Nasir and Matt discuss the increase in the salary thresholdfor exempt employees and how employerscan try to avoid paying overtime as a result.

May 18, 2016

Nasir and Matt discuss the Baltimore law that makes it very difficult to operate food trucks in the city. They also discuss all the legal restrictions tohaving a food truck.

May 11, 2016

Matt listens to Nasir recap the developing battle in his hometown of Vandalia, Ohio over whether a Dunkin Donuts can move into a location in close proximity to a local favorite donut shop. They then discusswhether the issue is more legal or personal.

May 9, 2016

The guys kick off the week by discussing a Nevada employee who is claiming she was fired for not supporting the Scientology beliefs of her employer.

April 27, 2016

The guys discuss the massive floods in Houston,how employers responded, and why one meteorologist became a local hero. They also discuss the steps businesses should take in preparing for storms outside the workplace.

April 20, 2016

The guys discuss the boycott of Amazon over the products of an unnamed presidential candidate. They also talkabout how a business should handle a boycott and whether it’s possible to exit one unscathed.

We represent businesses.
That’s all we do.

Oh, and we love it.

We love our work. We love reviewing that lease for your new location. We thrive on closing that acquisition that nearly fell through. We’re fulfilled when we structure a business to grow, raise capital, and be legally protected.

We focus on developing close relationships with our clients by being like business partners. A partner who provides essential, personalized, proactive legal support.

We do all of this without utilizing the traditional billable hour model. You pay for the value we bring, not the time spent on calls, emails, and meetings.

Our team is made up of attorneys and staff that share these values and we are retained by clients who want the same.

Pasha Law PC operates in the states of California, Illinois, New York, and Texas.

Meet Our Team

Fractional General Counsel Services

Pasha Law Select offers the expertise of a high-end general counsel legal team for every aspect of your business at a fixed monthly rate. Pasha Law Select is deliberately designed to allow our legal team to be proactive, to anticipate, and to be comprehensive in serving our clients. To be great lawyers, we need to know our clients. We can’t know our clients unless we represent a select number of clients in the long-term. This is Pasha Law Select.

Learn More