By Steven Siegler
Engaging independent contractors, rather than regular employees, to provide services to your business can have many benefits. These benefits include flexibility and reduced spending on wages, employee benefits, workers’ compensation insurance, and taxes. Further, independent contractors are not covered by many employment laws, including, for example, the Fair Labor Standards Act (wage and hour law), Title VII of the Civil Rights Act (anti-discrimination law), the Family and Medical Leave Act (family leave law), and the Employee Retirement Income Security Act (pension law). These reduced legal requirements are a clear benefit to businesses.
However, there are complicated standards at both the federal and state levels to define who is an independent contractor and who is an employee. It is important for businesses to get this distinction right because those who misclassify workers, even unintentionally, can face government audits and private lawsuits. Some risks of misclassification include liability for back pay and overtime compensation, employee benefits, disability payments and worker’s compensation benefits, tax obligations, liquidated damages, and civil monetary penalties.
To minimize the risk of misclassification, we recommend that any business considering engaging an independent contractor take the following steps.
First, define the position that the independent contractor will fill. The position should not have an employee’s job title, nor should it report to the same supervisor as employees of their level. Think of your independent contractor as a project specialist who is engaged to perform a specific task – one that your ordinary employees do not perform on a regular basis. Do not have a mixed team of independent contractors and employees who all perform the same tasks. Make sure that the independent contractor will set their own work schedule, has the ability to hire subcontractors if necessary, and use their own tools, equipment, and supplies. Lastly, and most importantly, ensure that the position is one where the independent contractor alone controls how the work is completed. If the business dictates how something is done, rather than what needs to be done, your contractor may be deemed an employee. Once you have the perfect position for an independent contractor, move on to the next step.
Second, evaluate whether the contractor is truly “independent” of your business. Ensure the independent contractor owns and operates their own business entity, complete with tax ID number and business operating account. They should carry their own liability insurance and possess all professional and/or business licenses required to do the work you are contracting them to do. It is also helpful if the independent contractor advertises their business on a website or through social media. These factors – or the absence of them – will greatly affect the way they are classified. If your contractor appears to be truly independent, then proceed to the next step.
Third, have a knowledgeable employment attorney draft an Independent Contractor Agreement to memorialize the terms and conditions of the engagement. This agreement will take the place of normal employee onboarding materials, such as an employment application, I-9 form, W-4, and an employee handbook. The contract should specify that the business will pay the contractor on a project basis, upon submission of an invoice, reportable on a 1099 form. Avoid paying your contractor a fixed salary or by the hour, week or month. Remember, this is supposed to be a business-to-business agreement, like contracts with your other vendors and suppliers. Do not provide employee benefits or reimburse the contractor for business expenses. Another key term to include in the independent contractor agreement would be a representation from the contractor that they own their own business, can work for others at the same time, control and direct their own work, maintain separate insurance, and possess other indicia of a true independent business. There are other key terms which should be included as well, which can be explained to you by your attorney.
With proper legal guidance, a business can take advantage of the benefits of engaging an independent contractor to fulfill its staffing needs, both legally and safely. If your business is interested in learning more about how independent contractors can help, contact KI Legal for a consultation by calling (212) 404-8644 or emailing firstname.lastname@example.org.
*PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME*
This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.
KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.