Hiring an independent contractor (IC) rather than an employee can have several benefits for a business owner, including reduced tort liability and diminished tax liability. But when a client tells me they want to hire someone as an IC my answer is, usually, “Not so fast.”
Unfortunately, even if the worker signs an IC agreement, a court will also look at the nature of the employment when determining the status of the worker. To keep my clients out of court and shielded from tax penalties, I determine the nature of the worker’s duties and how they fit into the following factors:
- Intent: Be clear with all written and oral communications that the worker is, in fact, an IC. It must be the belief of the worker and the employer that the worker is an IC. Although an IC agreement helps, make sure that all future correspondence and communications reflect the nature of the employment.
- Control: If you plan to control and monitor every detail of the work, then this person should be considered an employee. However if you simply assign a task or job, and the worker is free to complete the task or job as he or she wishes, then the pendulum swings to IC. Understand that the focus should be on the final result, not the details of the work in progress.
- Equipment: If you plan on having the IC use your phone, your computer, your desk – or more – you might as well hire them as an employee. I make sure my clients understand that a true IC uses his or her own equipment on a job or project unless the circumstances require otherwise.
- Business Entity: An IC should be its own business entity. Specifically, the worker should be an S-corp, LLC or sole proprietor. Therefore, you are not hiring an individual but a business entity to do the work.
- Termination: One of the few drawbacks of independent contractors is restriction on termination. An IC cannot be terminated if the IC’s conduct conforms to the terms of the agreement. In fact, if an IC is terminated in violation of an agreement, the employer can be liable for civil damages for violating the agreement. Keep in mind that there are ways to terminate an IC. You must remember to document every instance the IC breaches the agreement via videotape, audiotape, photographs, witnesses, written documentation or notes. And always mail written notice of the termination to the IC via registered or certified mail. The expense of an attorney-drafted letter will always be far less than defending a lawsuit for breach of contract.
- Compensation: Generally an IC should always be paid by commission or by the job. Courts will most always consider an IC an employee if he or she is paid a salary or by the hour.
- Taxes and Incentives: You should never deduct taxes or offer incentives like retirement plans to ICs. Independent contractors pay their own taxes, pay for their own insurance and plan for their own retirement. Remember that ICs are usually issued a 1099.
- Workplace: If the nature of the work does not require the independent contractor to be on your premises, insist that the independent contractor perform his or her work somewhere else.
You should always consult an attorney when making important business decisions such as hiring an IC. This article is for informational purposes only and does not create an attorney-client relationship.