independent contractor agreements

Independent Contractor Agreements: Beware of these Pitfalls

In Blog, Contracts 101, Independent Contractors by Shannon Montgomery

My practice focuses on helping my clients build, grow, and protect their businesses. This usually means that I must advise clients on a wide variety of issues. Often times I wish I could provide my clients with legal checklists on handling their issues to allow them to keep the workflow moving rather than having to interrupt their creative process to figure out some pesky legal issue. Unfortunately, the law isn’t well suited for checklists and how to’s. But, that doesn’t mean there are no general principles that I can share that might help you as the business owner navigate the world of business law.

Employee vs Independent Contractor:

One of the areas I counsel my clients on the most sits within the world of employment law and the proper classification of workers. Hiring a full-time employee vs an independent contractor is a decision that almost all businesses face at one point or another. And, it is the type of decision that has major legal and tax implications for years. The law in this area is regulated by many federal and state government agencies, so there is a lot to pay attention to. For more background on why the misclassification of employees is a big no no check out this article, I wrote a few weeks back.

Today, this article is going to review some of the biggest mistakes a business can make when hiring workers, give you actionable tips for ensuring you are doing the right thing, and hopefully help make the decision-making process a little bit easier for you and your business.

What to do and what not to do:
  1. Always Audit the business:

 First things first I see this all the time, and not just in the classification of employees but in all aspects of the business. People get legal help once and then never revisit the subject again. You simply cannot do that when it comes to classifying your workers as employees or independent contractors. This should be done at least once a year, if not every time the relationship with your workers changes. If you bring in new workers, or if someone who works for you takes on more or different responsibilities. Someone that was once an independent contractor can easily become a full-time employee according to the law by a slight change in your actions. So, always audit your workers and your classifications to ensure you are doing the right thing!

  1. Have written contracts:

 This is probably the biggest mistake I see clients and potential clients make. Most of the time there isn’t a single written document for their independent contractors or employees. If you don’t have a contract in place you as the business owner will almost always fail in a dispute over the status of a worker. Having an agreement in place indicating that the worker is, in fact, an independent contractor and is treated as such will help prove this if necessary.

Authorities expect the written contract to state that the worker in question is an independent contractor and will be paid as such i.e no tax withholding, benefits, etc.  The existence of the contract does not by itself mean the worker is an independent contractor, but not having one makes employee status more likely. Not to mention, agreements like this can also help protect your confidential information and intellectual property. If you don’t have an independent contractor agreement in place and you’re in need of one, send me an email I think I can help.

  1. Don’t Provide Tools or Supplies:

 I know you want to. I know it can be hard to relinquish control and let the worker do the work with their own tools or supplies. But, if you want them to stay classified as an independent contractor and not an employee you must allow them to do the work with their own tools. No, this is not dispositive and will not automatically grant a person independent contractor status but it is always considered in the analysis by the courts. If you work primarily in an office setting and you provide office space, desks, chairs, computers etc. to your workers yet you want them to remain, independent contractors, you will need to rethink this one. Obviously, the best practice is not to provide a worker with anything at all. I understand that can be impractical, so get with your attorney on this one. They should be able to help come up with some creative ways to allow the worker to get the work done without providing their necessary tools and supplies.

  1. Expenses Reimbursement:

This is another tricky scenario. The law is pretty clear that reimbursing someone for their expenses lends to that person being an employee. There is, of course, no bright line rule on this, why would there be? But, generally speaking reimbursing late night dinners, or the cost of the special program used in accomplishing the job will likely suggest the worker is an employee. Here is what I suggest. Craft a very detailed reimbursement policy that everyone in your business knows about, and must follow. Clearly, indicate that anyone hired as an independent contractor is responsible for all of their own costs incurred while performing the work you have hired them to do. I know this seems harsh, but it is the best way to keep the classification correct.

  1. Prohibiting Competition:

 Do not tell your independent contractor that they cannot work for anyone else while working for you. If you require full-time work or prohibit competition in any way, that independent contractor is likely an employee and you will owe them benefits and tax deductions as such. If you think your business needs to have control over what other positions your workers can have, you may need to consider employee’s only. If you feel that you need full-time hours from someone to make your business work, then perhaps independent contractors aren’t for you. If your main concern is a worker sharing sensitive information or using your intellectual property, you can protect that through agreements and still classify a worker as an independent contractor.

  1. Set Working Hours:

 Another mistake I see often is that clients want to require their workers to work certain hours every week. This gets hairy in the classification process. Typically an independent contractor is paid for the result of their work not necessarily the time spent on such work. You can have some control over the hours worked such that it is necessary for accomplishing the job. For instance, you’ve hired a virtual assistant to help with phone calls to potential clients. It is unlikely that the VA can or should call potential clients at 9 pm at night, so dictating certain hours to do this shouldn’t be a problem. Use your judgment when it comes to setting hours and controlling when the independent contractor can work. Be flexible and do exert more control than necessary.

  1. Exerting too much control:

 The amount of control an employer has over a worker is probably the main concern in classifying workers correctly. An employee is paid to do a job for certain hours on certain days with the expectation of the boss controlling the employee. The employer controls the “method, manner, and means” by which the job is accomplished. With an independent contractor, the employer exerts little to no control over the above.

Be very careful with the amount of supervision and control you use with your workers. Further, be careful what your agreements state in regards to the worker checking in, providing status updates on the project and the like. A worker is going to have to check in and update you as the business owner on how the project is going, but if you are always redirecting the worker or requiring more check-ins- you may change the original relationship from independent contractor to employee. If allowing a worker to accomplish the job with little to no supervision isn’t something you think you can do, hiring actual employees might be the best option for you and your business.

Conclusion

Sadly, the above is only a short excerpt from a long list of things business owners need to be careful with when hiring workers. This is a great starting point to evaluate your business and your workers from but of course, my best advice is going to be to find an attorney that you can call for help and advice incorrectly classifying your employees or independent contractors. They should be able to navigate the wild world of classification with you as you grow and build your empire!

 

Please note that this is not meant to be legal advice for you or your situation, this is merely some legal research and knowledge on the given topic.