Should You Hire Employees Or Independent Contractors At Your Play Cafe Business?

We talk a lot on my Profitable Play podcast about delegation and with that comes the entire conversation about recruiting, hiring, and retaining high-quality employees. However, as I described in more detail back in episode 163 of the Profitable Play podcast, that can be easier said than done.

(And by the way, if you'd prefer to listen to this article via audio format, it's available on my podcast here!)

Forecasts by Korn Ferry cited that by 2030, more than 85 million jobs might go unfilled as there won’t be enough skilled people to fill them.  Deloitte estimated that at least 1 million more retail laborers are required, in addition to the 15.7 million existing employees, for the industry to thrive.

According to advisory firm IHL, the most significant challenges to inventory distortion are the availability of workers and the disruptions outside of the immediate control of the retailer.

And real quick, basically inventory distortion is referring to lost sales from out-of-stock items and similar issues that often plague retailers.

For us in a more service-based business, inventory distortion might look like not being able to host certain classes or events or book enough party slots to fill demand, simply because we don’t have enough staff willing to work those shits.

And this loss of sales can be crippling to a business. 

And basically, what this advisory firm is also saying is that business owners are operating from a place of scarcity right now- and that’s a dangerous thing. They are making key business decisions not based on their customer demand numbers but instead based on how many staff members they have to fill that demand. And this often leaves a BIG gap in a businesses true sales potential and what they are actually able to produce in this stark current reality. 

Overall, the retail hiring situation is clouded with uncertainty, and the worker shortage is a major concern to retailers–particularly with the increased demand for associates around their busy seasons where they rely on increased sales to fuel their business through the slower times.

All of this uncertainty can leave retail business owners like us having to think outside the box when it comes to fulfilling our customers’ demand. In episodes 163 and 164 of the Profitable Play Podcast we talked about the option of hiring virtual assistants or remote employees for tasks like bookkeeping, marketing, and business organization that don’t require physical presence in your brick and mortar business. And while that can certainly help fill in the gap between the tasks you wish to delegate and what can actually be fulfilled by your team, some tasks will still require you to hire local in-person retail employees, which is where many of us are struggling right now.

This often shifts the conversation to the difference between hiring actual payroll employees versus 1099 contractors to fill the needed roles in a company.  So let’s talk about the difference so you can make the soundest decision for your business.

First, let’s consider the difference between the two categories of workers.

When you hire someone, they will be classified as either an employee, or an independent contractor.

With employees, you’ll have more control over their performance and actions, but more compliance obligations. With contractors, you’ll have less compliance obligations, but less control.

Let’s examine how the IRS determines the difference between a contractor and an employee.

In the end, it comes down to four main factors for retail businesses:

1. Performance. If you exert control over your worker’s job tasks (such as when, where, and how they work), then the worker is more likely to be considered an employee by the IRS. If your worker chooses when, where, and how to work, then the worker is more likely to be a contractor.
2. Equipment. If you provide equipment (coffee equipment, POS system, a brick-and-mortar store where your employee’s tasks will be completed) for your worker, then the worker is more likely to be an employee. If your worker provides their own equipment, then the worker is more likely to be a contractor. For example, if you hire a balloon vendor to build an arch for a party and they bring their own air compressor, balloons, and balloon stands– they are likely considered a contractor and you can pay them as such. If you hire someone to provide your parties with balloons on an ongoing basis and YOU as a business owner buy the balloons, helium or air machine, stands, party decor, etc.-- that’s considered hiring an employee by the IRS.
3. Payment. If you pay a worker on a regular, ongoing basis (especially without a termination date), then the worker is more likely to be an employee. If you pay a worker on a project-basis, then the worker is more likely to be a contractor. Going back to the balloon example, if you pay per installation, that may be able to be considered a contractor. 
4. Term & Termination. If either party can terminate the relationship at any time, for any (legal) reason, then the worker is more likely to be an employee. If the parties’ termination rights are subject to a contract (for example, a service or task must be performed according to a specified agreement, like a balloon arch for a specific party on a specific date that this contractor agreed to), then the worker is more likely to be a contractor. 

Next, let’s look at the tax obligations of each and how we pay employees versus contractors.

As you likely have been all-to-familiar-with since you became of working age, taxes are usually required to be paid on wages.

How these taxes are collected and paid, though, depends on how an employee is classified which, again, is determined by the above factors amongst a few others such as whether you offer benefits like healthcare and paid time off which, to keep things simple, we aren’t covering here since it’s not super common for those things to be provided in our industry. Just know if you DO plan to offer healthcare and other benefits packages, this adds a layer you’ll need to research with your lawyer and accountant.

With an employee, you as the owner will withhold taxes from their check and remit it to the government as the law requires. I can’t recommend hiring a virtual or local payroll company enough to take this burden off your plate since it can get complicated and result in pricey fines if you complete this task incorrectly.

These withholdings also include things like disability, unemployment, and workers compensation taxes. If you’d like to learn more about these 3 types of withholdings and what insurance you’re required to carry for each on your side as a business owner, I have a YouTube video on this topic here.

With a contractor, you can usually avoid workers’ compensation and unemployment tax obligations.

However, if you pay a contractor more than $600 in one year, then you need to use W9s and 1099s for that contractor. That’s where the term “1099 contractor” you may have heard comes from.

A W9 is a form you’ll collect from a contractor at the beginning of your contract with them, and it will simply state their business information, Tax ID number, and things like that. You will also want to verify that they carry their own liability insurance before you do business with them.

As long as you have collected the W9 form from each contractor, you can then complete a 1099 form after a tax year has ended. You’ll likely provide your tax accountant with the contractor’s information and how much you paid them and you’ll give a copy to the IRS as well as the contractor. The IRS will then use that information to make sure the contractor reports the payment on their tax return.

Now let's navigate a tricky subject– intellectual property.

When you hire an employee, you typically retain the right to any intellectual property they create during their time working for your business. For example, if they take video and photos, create marketing materials, come up with classes and programs and write curriculum, etc– 

Since you hired them as an employee and provided them with the tools and equipment to create, you will own the rights to the IP they produce.

If you hire contractors, even if you pay them, they will typically own the rights to the intellectual property of work they create for your business. 

This means they can produce work for you, and walk right over to your competitor and legally replicate it for them.

You can put safeguards in place to protect yourself, like for example you can distinguish creative work as “works made for hire” in your written independent contractor agreement (a template of which I provide to all of my Play Maker Society program)-- but it’s not a fool proof system. 

I will share some tips about working with independent contractors in my next episode, but to summarize my suggestions in regards to hiring employees versus independent contractors first–

You should likely hire employees if:

• The nature of the work you need done requires your supervision or control
• You want to control the hours of work and the tools and equipment used by the worker
• If you are filling a long-term need (as opposed to a one-time or sporadic need for balloon arches for a party)
• If this work is essential to your business and not a peripheral job. For example, a person checking customers in and operating your POS system is essential, a social media manager is not considered essential

You can hire a contractor if:

• The work is not central to your business; for example, cleaning after-hours or scheduling social media posts
• The work can be done in a location and style completely determined by the contractor
• The contractor can determine their own hours and use their tools to complete the task
• The work is a short-term project that will be completed in a defined period of time
• The worker has professional expertise or is someone who needs little supervision, like an established balloon artist

In the end, I generally consider both employees and independent contractors to be essential in operating a successful and sustainable indoor playground or play cafe business.

Even in the example I gave in Profitable Play Episodes 163 and 164 of hiring a virtual assistant, you will need to decide if that position ends up being filled by an employee or an independent contractor.

The takeaway I want you to get from this is that the decision to hire a worker as an employee or independent contractor should always be done on a case-by-case basis.

I would typically NOT expect to run an entire businesses’ operations solely with 1099 contractors, as this can leave you as the owner with little control over your team’s performance or the quality of work they produce. You will not have the same rights to train a contractor in your company’s values and standards as you would a payroll employee– and this can be devastating to a brick and mortar business who is largely customer facing.

If your customers have a completely inconsistent experience with each employee due to this lack of training and standards, not only are they not likely to become long-term customers, they will also likely not trust you to provide quality service for larger, more important investments like a birthday party for their child’s special day.

It may seem like a smart move to hire contractors at the beginning in terms of cost and time, but I promise– this can end up being an absolutely critical mistake when much of our businesses success relies on our customers’ experience with our team.

I generally recommend a MIX of employees and contractors to operate your business at peak efficiency– which again I give some tips about in Profitable Play Episode 164.

One last thing I want to leave you with– you should be aware that the IRS considers a worker to be an employee unless you can prove otherwise.

So even if your plan is to hire ONLY contractors to “supposedly” save yourself from perceived obligation (again, this can be a HUGE mistake), if they do not meet all of the requirement to be considered a contractor as I outlined at the beginning of this episode, you may find yourself having to consider them an employee in the eyes of the IRS anyway, especially in the case of an audit which are all too common for retail businesses.

For example, if the IRS finds that you dictated your contractors schedule, work environment, and required them to use your materials and equipment– you may not only be required to consider them an employee retroactively, you can be hit with hefty fines and back pay. So if the job description you’re looking to fill does NOT meet the specifications of a contractor, again, I urge you to hire an actual employee and train them on your standards and values.

It will take more time upfront but can ultimately be the keys to your success in the long run. 

And if you’re listening to this and are thinking, “well, I will hire a few contractors and then work at the physical business myself with my kids!” I appreciate and admire your optimism, but please, end this episode and head right over to check out my latest youtube video where I explain how that can be equally as crucial a mistake as hiring strictly contractors.

If you are in Play Maker Society I provide all of the employee manual and training materials you will need to make this process much easier and less of a burden.

All of the information to join Play Cafe Academy or Play Maker Society is available if you click below!