Like most of life, choices in the context of operating a business are not always as straightforward as one might like. Take, for instance, what happens as business starts to pick up. It's fantastic to see that more and more clients are lining up at your door, whether in a virtual sense or actual. The dilemma is that, unable to see the future, we can't know if that uptick in business is going to become an upward trending line on the sales volume graph, or a blip that is not sustained.
Things to consider at such crossroads include infrastructure such as warehouse space, larger offices, inventory strategies, and staffing.
Perhaps most challenging is the decision whether to add staff, and if so, how and when. Most employers actively try to avoid layoffs and reductions in staff, to avoid the financial impact, of course, but most also feel some sort of moral obligation to employees who perform their jobs well.
Some employers strive to avoid this issue by contracting with individuals as independent contractors rather than as employees. Whether they really qualify as independent contractors or not, the employer may feel that this designation gives the employer legal and moral 'cover.' Unfortunately, at least from a legal perspective, it does not.
Whether a person performing work for your company is an employee or an independent contractor is largely a question of law. You can (and should) have a written agreement with any independent contractors you contract with, but that won't protect you in the event that they really are classified as employees under the applicable law. If there are persons who are being paid as independent contractors to do work that is central to the operation of your business, they are likely to be reclassified as employees in the event of an audit or investigation. This is especially true if there are also employees performing the same types of tasks.
The potential risk of misclassification is pretty significant. Once one agency has identified a business for investigation, or one employee submits a claim (workers comp, wage and hour, etc), the various federal and state agencies will cross-report to each other, and this will result in multiple agencies investigating and possibly imposing fines or penalties.
The tests that will be utilized vary from agency to agency but the primary consideration is the “right of control” – or who directs the work. Other factors include the nature of the relationship (whether paid for a specific project or ongoing hourly or weekly pay); who supplies the instrumentalities/tools, place to work; whether the individual is engaged in their own business with other clients or works solely for your business; whether the person is supervised by someone at your company; and whether you have the right to terminate at will (if so, they are more likely to be found to be an employee).
California law is generally hostile to the independent contractor classification. There is a statutory presumption of employee status, and you as the employer would have the burden of proving otherwise. This is not to suggest that each arrangement to provide services is an employer/employee arrangement, just that you should proceed with caution, and perhaps the advice of your attorney, when it comes time to increase your production capacity.