HOW TO HIRE AN INDEPENDENT
CONTRACTOR vs EMPLOYEE
Talmar Anderson, Boss Actions & Cheryl Hodgson, Attorney & Founder of Brandaide
Many business owners engage companies and individuals for part-time and project work by hiring independent contractors. When hiring an independent contractor vs employee, there are two action steps required. While separate and distinct, they are highly correlated. Both are required for success. These two steps include:
- Understanding and navigating the hiring process and the difference between independent contractor vs employee.
- Documenting the relationship with a consulting or independent contractor agreement
First, how do you know for certain whether the outside vendor of services has the necessary skill set to successfully meet the hiring requirements of your business? Will they complete a project and deliverables in a timely and professional manner?
Once you’ve identified and are ready to engage an independent contractor for project work, or even for part-time ongoing services, a written independent contractor agreement will help establish ground rules and avoid pitfalls in hiring an independent contractor. You’ll also need to make certain the chosen company or candidate qualifies as an independent contractor vs. employee for tax and payroll purposes.
Hiring an Independent Contractor Begins
with Knowing Yourself, Boss
As a business owner, making decisions about how others will work in, or for, your company is an inevitable milestone. Unfortunately, too many wait until they are so buried they allow under-performers and companies that are not truly going to deliver what a business needs, to jump into the line waiting for your company’s dollars.
The truth is, we can structure your business in just about any way that you want to have it. If you want a company full of experts doing their own things, coming and going, then likely you will be attracted to working with an independent contractor. These require less management time (NOTE: This does not mean no management time is required). However, you need to be very comfortable managing and paying for results only. This model is not for the micro-manager type. Independent contractors are best when you have a short-term need such as developing or testing a new service or product.
However, once it becomes an intrinsic part of your business, the standard Independent Contractor engagement with only 30 days’ notice leaves you vulnerable to possible labor shortages. Now you only have 30 days to hire and onboard a replacement for your next project.
If you are a business owner that knows you want to give specific direction on how, when, and what your team is doing day in and day out, you are looking to build a business model of employees. This allows you to set and hold accountability around a responsibility to do the job the way you expect…every step of the way. Employees allow business owners to plan for capacity and ensure consistent quality in the results.
Small business grows best with a fluctuating team that consists of vendors, independent contractors, and employees. The big question here is Do you want to be the Boss of a team that delivers your vision your way? Or, do you want to engage with experts that can deliver a project result without any obligation on either of your part to continue working together? What works best for you in each role, and each hire may be different and can change as you grow.
Independent Contractor vs. Employee
Before services begin, you will need to know whether your new team member is an employee subject to federal withholding and social security contributions. Or will he or she be a 1099 independent contractor who receives a “miscellaneous income” IRS form early in the new year?
The topic of whether someone on your team qualifies as an independent contractor vs. an employee is a hot topic. The State of California has narrowed the scope of individuals that can legally be considered an independent contractor vs employee. Here is a link to a more depth briefing on hiring independent contractors in California. The IRS also publishes guidelines for determining whether an individual is an independent contractor vs employee.
Consider these Critical Points when Deciding to between IndependentContractor vs Employee
- Is the work type typically done under the direction of a supervisor or done by a specialist without supervision, and is the work project-based, or an ongoing service agreement?
- Independent contractors normally set their own hours and control their own means of providing services, including equipment, supplies, and licenses. The “employer” has the right to control or direct only the result of the work and not what and how will be done. The IRS “right to control” test has been the traditional test.
- California has created the ABC Test which is more restrictive than that found in most other states.
- Certain licensed professionals are exempt, i.e., they qualify as a 1099 independent contractor provided they meet the standards of the California Supreme Court ruling in Borello vs. Dept. of Industrial Relations. Review those requirements here. Some of those that are exempt are contract attorneys and paraprofessionals.
The Written Independent Contractor Agreement, aka Consulting Agreement
Written agreements are always advisable, even for an “at-will” or project-based vendor. While the provisions of the agreement will vary depending upon the scope of services, there are key provisions common to all contractor agreements. Here are some of the key provisions of an independent contractor or consulting agreement, including reasons to have a written agreement in the first instance.
- Establish that you are hiring an independent contractor. By clearly defining that the services are those of an independent contractor, the individual will not be entitled to either employee benefits, or protections under state and federal law for employees. This includes health insurance, unemployment benefits, and worker’s compensation.
- Insurance Requirements. Does the nature of the services require that the outside vendor provide proof of insurance?
- Scope of Work. Outline in detail the deliverables due from the independent contractor and when. Lack of clear deadlines is
- Payment schedules and Delivery Deadlines.
Make certain to specify in writing project milestones and delivery deadlines as a prerequisite to making progress payments, particularly for technical projects. This includes specifying well-defined milestones that must be met to receive the specified installment.
For example, hiring website designers and developers is an area fraught with peril. Developers often delegate one or more aspects of the website to their own independent contractors. They seldom seem to deliver fully functional websites on time. Payments should be in installments and tied to deliverables and proven functionality as set forth in RFP’s and attached to the agreement.
A clear specification of who will pay for expenses incurred in performing the work should also be included in the agreement.
- Confidentiality, non-disclosure, and trade secrets. All independent contractor agreements should contain confidentiality and non-disclosure provisions that are signed prior to the commencement of work. Protecting confidential business data is especially important for vendors with access to customer lists, financial information, or any confidential business process or system. Unless it is your doctor, attorney, or clergy, where the law automatically imposes a relationship of trust, there is no confidential relationship without a signed contract.
- Non-competition and non-solicitation. Is the work of a nature that you would not want the independent contractor working for a competitor at the same time? Non-solicitation means the contractor cannot solicit your customers, clients, or your employees while performing services, and for a period of time after the services are completed.
- Ownership of Intellectual Property. A consultant or independent contractor that creates copyrightable content for your business must sign a written agreement. This agreement is commonly referred to as “work-for-hire” agreement and must contain magic language defined by the Copyright Law. Without a signed agreement the copyright to the content remains with the contractor, not the “employer”! A work-for-hire provision is mandatory for copywriters, outsourced marketing consultants, web designers, graphic designers, blog writers, and software app developers. Don’t risk being held hostage to access websites or apps even after paying for the work by failing to secure a signed agreement. This has happened to several of Cheryl’s clients over the years.
- Access to Data and Work in Progress. Closely related to IP are technical projects such as websites and software apps. The contracting “employer” needs to know where the project is housed, and how to access it. Again, don’t find yourself held hostage when you don’t have logins or access to projects being hosted on staging servers that are controlled by the service provider. Set up staging sites on your own hosting platform, not those of the independent contractor.
- Grounds for Termination. If the contractor fails to perform, or the deliverables are not as agreed upon, how and when can the agreement be terminated?
- Dispute Resolution. What law will govern, and how and where will disputes be resolved should they arise?