Diana and Earl incorporate their computer technical support business as Fast Aid, Inc. Diana contracts with Gina to respond to Fast Aid's customer service calls on a commission basis. What are the advantages and disadvantages to Fast Aid of classifying Gina as an independent contractor rather than as an employee? Earl obtains a loan from First National Bank and signs a promissory note for repayment of the amount without indicating that he is doing so on behalf of Fast Aid. Fast Aid does not make enough profit its first year to make payments on the loan. Charging default, the bank files a suit against Earl for the unpaid amount. Earl responds that he was acting on behalf of Fast Aid. Will the bank succeed against Earl? Why or why not?
What will be an ideal response?
The advantages of using an independent contractor instead of an employee include not needing to withhold income taxes and Social Security and Medicare taxes from payments to the independent contractor. It is not necessary for an employer to make matching contributions for withheld Social Security and Medicare taxes. There are no premiums for workers' compensation or unemployment insurance. The employer of an independent contractor is not subject to laws governing employment relationships, which cover only employer-employee relationships. The disadvantages of using an independent contractor include the lesser amount of control that an employer can exercise over how the independent contractor performs his or her work. If an employee is misclassified as an independent contractor, there can be considerable tax liability, with penalties. As for First National's suit against Earl, the bank may succeed because Earl did not indicate that he was making the loan on behalf of Fast Aid. When a party who enters into a contract on behalf of a corporation does not make it clear that he or she is acting as an agent of the corporation and not in his or her individual capacity, the party may be held personally liable on the contract. This principle also applies to negotiable instruments, including promissory notes. To avoid liability, Earl should have expressly signed the note in a representative capacity.
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