Now more than ever, many businesses rely upon independent contractors (a/k/a “consultants,” or “freelancers,”) to assist with their business or company’s needs. This holds true for start-ups, tech companies, professional firms (including financial advisers), merchandisers, and non-profit organizations, just to name a few. Just for review, an independent contractor is a worker (not an employee) who provides services to a company or business in exchange for compensation, while exercising a high degree of control and autonomy over their work (addressed in this article, below). For example, you may hire a marketing consultant for your non-profit or business, to perform work on a periodic or even regular basis. The independent contractor is responsible for paying their own taxes at the end of the year (the business which they worked for sends them a 1099 statement).
The economic benefits of hiring an independent contractor are clear: your firm or company can save significant sums of money — being freed from some of the fixed costs associated with employees, such as: payroll taxes, workers compensation, and contributions into that worker’s Social Security, Medicare, unemployment insurance, and other related federal and state taxes, over-time pay requirements (if applicable) and so forth. You may also benefit from not having someone full-time, when there is only as-needed freelance or per diem work to outsource.
Don’t make this crucial mistake:
*One costly mistake that companies make is to hire a worker who is really an employee, yet is erroneously classified as an “independent contractor.” Thus, the worker is paid as a 1099 employee, and may even have a contract that gives them that title, but is found by the government to actually be functioning as an employee of your business. This could carry hefty penalties, fines and audits of your business, by such groups as the I.R.S. and the State Department of Labor. Moreover, if you are found to have more than one employee who is incorrectly classified and treated as an independent contractor, then these costs, fines and penalties can often financially cripple your business.
In order for your company, non-profit or business to have effective independent contractor arrangements, without going astray of the law, here are eight key items that you must include in your arrangements with independent contractors:
- Require that the worker, as an independent contractor, owns and uses their own equipment. Verify that the contracting worker (not your company) owns the *primary equipment* that is used to perform work. (The worker may have access to your company’s computers or equipment, but be sure that they understand that they are required to either purchase, rent or otherwise own the equipment needed to get the job done – whether it’s a laptop and printer, or tools for a construction job).
- Require the worker, as an independent contractor, pay all expenses associated with doing their job, be it travel, printing or copying costs, purchase of needed software or tools, etc. Companies should maintain that the contractors, who presumably own the equipment,are responsible for costs associated with equipment maintenance.
- Require the worker, as an independent contractor,to be paid based on performance, not by the hour or any other time period. When possible, require that contracting workers be paid for the actual work being accomplished (such as on a project by project basis), instead of on a salaried or hourly basis. It is further wise to ask your independent contracting worker to send you and your company periodic invoices for the work that they perform, with a specified billed amount (the amount you and the worker agreed to in advance), to be paid by your business or company. *Make it clear that your business and the worker negotiated this rate and payment arrangement.*
- Allow the worker, as an independent contractor, to set their own work schedules. This may vary to an extent, and you may require the worker to work within certain time frames of office hours, for example. However, if you hire someone for 20 hours of work per week, and if it does not matter which specific days they choose to work the 20 hours, then leave that scheduling up to the worker to decide.
- Make it clear to the worker that, as an independent contractor, they are free to accept requests for other jobs, work assignments, or projects, through or from multiple clients, or directly from their own customers. (Note: if there is a particular professional conflict of interest between the independent contractor working for you and one or two of the worker’s other possible clients, this should be addressed in advance). However, where no conflict of interest exists, make it clear that the worker is free to work for other businesses or clients of their choosing.
- Do not impose restrictions on appearance. This is a rarely talked about aspect, but it is wise to further establish that the worker is not beholden in the way that your employees are. Thus, independent contractors should not be required to wear a company uniform, or to conform to other superficial restrictions on facial hair, tattoos, etc (to the extent possible). However, your business or company may require independent contractors to carry company badges, I.D. cards, business cards, etc., for identification / security purposes.
- Do not require them to sign any non-compete agreements (and follow-through with this condition!) Non-disclosure or confidentiality agreements are okay, regarding your company or firm’s private or proprietary information. However, if you force the worker to sign a non-compete, then you are exercising a level of control or autonomy that is more akin to an employer / employee relationship. Make this condition clearly spelled out in any contractual arrangement with the independent contracting employee.
- Limit company-specific training. As the manner in which work is completed should be at the discretion of the independent contractor, make it clear in your arrangement with your independently contracting worker that they are not required to complete employee training programs or training seminars, related to company business practices, customer relations, safety issues, etc. This is also subject to any government regulations requiring licensing, minimum standards to follow, etc. The requirement that a company in your industry must provide certain safety related information may extend to independent contractors, but as for training on how to do the work, it’s often best to leave that up to the independent contractor (so long as they deliver the results that you are looking for).
It is best to memorialize the above eight items in a contract with your independent contractors, and to make sure that you and your business are abiding by these eight criteria. Please note that the above is not an exhaustive list of all factors — nor do they create a 100% guarantee that you have properly classified your workers. It is wise to consult with an employment law attorney on these matters. However, if you follow the above criteria, your business is much more likely to have proper classification of your independent contractors — and evidence that you can present, if ever challenged or questioned about the nature of the work relationship.
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