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How to Avoid Treating your Independent Contractor as an Employee


Are you treating your independent contractor like an employee?

Many business owners do not recognize that certain forms of behavior and actions toward an independent contractor really classifies that person as an employee. If the independent contractor is found to really be an employee then this classification can have enormous implications for a businesses overall liability, (i.e.; employment law and tax implications) both immediately and for many years into the future.

Tips to help you avoid treating your independent contractor like an employee...

1. Have a Written Contract

You should have written contracts for independent contractors especially those who perform regular and long term projects spanning for months or years. Without a written contract, you will not likely win over any future dispute over the status of that worker regardless of whether the disputes begins with the worker him/herself or the government. The reason is that the government and insurance authorities expect a business to have a written contract stating that a worker is an independent contractor and will be paid as an independent contractor with no tax withholding, no benefits etc. Therefore, it is in a businesses best interest to have a written agreement to point to for future disputes.

2. Avoid Confusion and Distinguish Independent Work from Employee Work Performed

While there is nothing wrong with having multiple employees and independent contractors employed by one business it is not a good idea to have them perform the same job duties. The reason is that those workers a business is trying to treat as independent contractors may be reclassified by the government (IRS, state tax authorities, labor employment agency etc) as employees for performing substantially similar job duties as those classified as employees. So it is very important to distinguish between the two types of workers.

3. Avoid Providing Tools & Supplies

As a general rule independent contractors are required to supply their own tools and supplies for the particular trade for which he/she is providing a service (i.e.; painter will bring ladder and paint, shovel etc). However; the line can get a bit blurred when it comes to independent contractors who work in an office since it might not be very practical to expect the worker to bring his/her own desk, chair, computer, telephone etc. Nevertheless, if a business wishes to keep the office worker under the independent contractor classification one possible way is to pay that person by the hour (see discussion below). 

4. Avoid Reimbursing Expenses (Can be Risky)

There is no rule that a business cannot reimburse certain independent contractor expenses; however, doing so can be risky since it could suggest, when scrutinized, that the person is an employee. Therefore, it is important for a business to consider this risk and possibly find alternative ways to factor those costs into the final price for the finished product or service.

5. Consider Paying by the Hour

How a business pays a worker can be a fundamental indicator of whether that worker should be classified as an independent contractor or an employee. To avoid scrutiny and confusion a business should explore ways of packaging payment for products or services or pay an independent contractor by the hour. However; if paying by the hour is not practical or reasonable then a business could consider a payment regimen or a project fee basis of payment.

6. Ensure Company Documents & Policies are Updated

A business should ensure that internal documents and policy terminology distinguish employees from independent contractors. For example; a business might want to have an "employee file" for each employee and an "independent contractor" file for the independent contractors. For payment a business might want to have the independent contractor submit an invoice which is distinguished from the employee who submits a time card. Likewise; a business might want to document and handle the discipline of the independent contractor differently than the employee.

7. Avoid Over-Supervision

Over-supervising an independent contractor can cause that person to be categorized as an employee because of the control factor. Unlike an employee who is paid to do what he/she is told (method, manner, means) an independent contractor is paid to deliver a product or a result whereby he/she would have the freedom to use whatever method, manner or means he/she feels is appropriate to get the product or result accomplished with zero to minimal supervision.

8. Avoid Set Hours or Set Schedule

Requiring that an independent contractor have set hours is very risky since the time-clock is a classic sign of "employee" status. Instead a business should allow the independent contractor to complete the product or result on their own schedule as long as deadlines are met. This type of flexibility would help the company show that the person is an independent contractor and not an employee.

9. Avoid Prohibiting Competition

Requiring the independent contractor to perform full-time work and/or not allow competition will likely be viewed as employee-like so a business should avoid these type of tactics and review whether or not such constraints are needed.  

But is avoidance even possible for your business?

If it is not possible for your business to follow the tips above - i.e.; - keep influence and direction over the independent contractor worker to a minimum, let him/her come and go as he/she pleases, allow him/her to work part-time and for other companies, and allow him/her may make some of his/her own decisions, - it is it probably not realistic to treat that person as an independent contractor. Consequently, your business should seriously consider other alternatives with the guidance of in-house counsel or a business lawyer which will help you avoid costly legal consequences like reimbursement of: wages (including overtime), state and federal back taxes and penalties, workers compensation and employee benefits.

Reference article: Business Law Today, Do's and Don'ts When Using Independent Contractors, By Robert Wood, June 2011

SBA article: "Hire a Contractor or an Employee"

*The material in this publication should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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