Independent contractor

Why America is going the way of the freelancer

June 22, 2011: 11:14 AM ET

While it's often less expensive upfront to hire independent contractors, it comes with considerable risks. Gene Zaino, CEO of MBO Partners, describes the challenges.

Interview by Tara Moore, reporter

Gene Zaino

Gene Zaino, CEO of MBO Partners

FORTUNE -- There's a change in the culture of 'work' in America, and the A.D.D., anxiety-ridden professional is faring better than his tenure-tracked counterpart. Yes it's cheaper to hire independent consultants, with no benefits, but companies are now more susceptible to compliance risk.

Gene Zaino, CEO of MBO Partners, an independent consultancy services firm, says companies hoping to keep down labor costs by banking on independents now realize the tightrope they're walking. Running lean could end up meaning running up massive unforeseen tax bills or inviting lawsuits.

We asked Zaino, currently serving on the expert advisory board of the Human Capital Institute, to walk us through how the corporate world is dealing with reinvented careers. [To read Fortune's cover story, Pulling off the ultimate career makeover, you can purchase it from Amazon or download Fortune's iPad App.].

FORTUNE: What is a temporary employee vs. an independent contractor?

Gene Zaino: Temporary employees are part-time workers and temporary people. They're basically employed by a staffing company, and are paid on a W-2, generally. They have a recruiter that places them on site.

Independent contractors include everyone that is not an employee—they are employees of themselves. Contractors can be defined as real estate agents, physical therapists, consultants working for a company, or they could be the gardener. Those are the people that are 1099s, or LLCs, or micro companies/small companies that are small employers of maybe one or two or three employees at the most.

So what are the risks associated with contractors?

Well there really are 3 main risks. The biggest risk is tax risk, the next risk is what I would call labor risk, and the third is business risk of liability.

In the environment we live in today which is deficit-rich, both the states and the federal government are looking for areas to collect taxes. More

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