According to recent research, a business can be expected to save as much as 40% on labor costs by hiring contractors. However, did you know that according to the same research, it has also been found that many businesses misclassify anywhere from 10% to 60% of their workers as independent contractors?

From the employer perspective, it’s imperative to your business’ survival to understand how to appropriately classify your workers as based on what is defined by the United States Department of Labor. From an individual perspective, it’s equally as imperative to understand the various rights and protections afforded to you by the Department of Labor, whether you are classified as an employee or a contractor.

Whether you’re looking to hire independent contractors for your business or you, yourself are a freelancer or individual business relying on contracting work, you’ll need to remain well-versed in the matter.

So, if you’ve been interested in understanding more about independent contracting and the regulations, laws and agreements associated with it, then this quick and simplified article is a perfect fit for you.

Employees vs. Independent Contractors

There are several distinctions that the United States Department of Labor and Internal Revenue Service make when it comes to employees and independent contractors. Perhaps the most significant is that workers classified as employees have certain protections afforded to them under the Federal Labor Standards Act (FLSA) which independent contractors are not entitled to, as they are technically considered self-employed.

When it comes to defining the characteristics of an employment relationship, it’s important to understand that the U.S. Supreme Court has numerously indicated that there is no one single determining factor that distinguishes an independent contractor from an employee.

Rather, according to the Department of Labor, the Court takes into consideration several factors, among the most significant being the following:

1. The extent to which services rendered by the personnel are vital to the principal’s business.
2. The “permanency of the relationship” between both the principal and their personnel.
3. The personnel’s investment in “facilities and equipment” necessary for the job.
4. The “nature and degree of control” that the principal has over the personnel.
5. The personnel’s opportunities for both “profit and loss”.
6. The amount of “initiative, judgment, or foresight in open market competition” that is essential to the success of the personnel.
7. The “degree of independent business organization and operation”.
   
   

It is also important to note that neither the absence of a “formal employment agreement” nor the location of where the work is performed are deemed material in the determination of whether or not there is an actual employment relationship. In fact, all too often individuals working from home are improperly classified as independent contractors by their employers.

When it comes to misclassification, the penalties can be quite considerable, so it’s essential to do your due diligence.

Fortunately, the IRS has provided resources for those unsure of classification status, including the option of filing what is called a “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” form (Form SS-8).

The Independent Contractor Agreement

An independent contractor agreement is a written contract which can be drawn up between two parties in order to establish the relationship and duties of both for a particular service or project. This differs in the average employment agreement in that it is specifically set to spell out why the worker is being hired as a contractor as opposed to an employee for various legal and tax purposes.

Independent contractor agreements are quite common – especially for small businesses. This is primarily due to the fact that many small businesses simply  aren’t as prepared to adequately handle the regulations, payroll taxes and financial obligations which come with managing personnel classified as employees.

When drafting independent contractor agreements, there are a few tips that can help ensure you end up with the most effective solution for your business-to-business relationship as possible.

Hire a Professional

The first tip of course, is to hire a certified legal professional to oversee the process. While there are numerous templates available online at your disposal, you want to have the peace of mind that the agreement you are using is tailored ideally to your particular situation in order to avoid the headache of potential litigation.

Be Aware Potentially Problematic Terminology

For example, as a principal, it would be important to be wary of the word “partner” being listed in any independent contractor agreement. This is because the term “partner” has a very specific legal meaning and you would never want an independent contractor to be perceived as a business partner.

Cover Your Bases

One of the main purposes of the independent contractor agreement is to spell out exactly why a worker is being classified as a contractor. Phrases such as “The company understands contractor will pursue other clients”, acknowledging that the contractor is responsible for handling their own taxes and not entitled to any benefits help reinforce the legally defined parameters of the relationship.

Communications

When it comes to handling communications between two parties, it is a best practice to ensure that every agreement or change is done so in writing and thus, stipulated as such within the contract.

Personal Information

While personal information such as legal names, companies and addresses are often stated on independent contracting agreements, that doesn’t mean that any and all personal information is necessary to include. For example, it’s always advised that you never include your social security number in these agreements and that tax identification numbers (TINs) be used instead.

The Devil is in the Details

If the success of the business relationship is hinged upon numerous important factors, it would be best to lay these out in the agreement as well. Details on project requirements and duties, billing rates, invoicing, deliverables, processes and timelines should be laid out in detail.

Don’t Forget About Confidentiality

Verbiage surrounding the protection of confidential information including plans, trade secrets or important data should be considered heavily and spelled out in great detail.

Termination

Including provisions regarding on the rights and remedies of both parties is also essential in the event of a  contract breach or termination. On the contractor’s side, wording regarding a notice of termination (i.e. thirty days) or being able to include a “kill fee” in order to help recover costs upon termination would be extremely beneficial.

A severability clause is a provision which stipulates how an invalid or unenforcible term affects the validity of the contract as a whole. Parties will want to ensure that the contract is still binding regardless and can still stand as long as the ultimate essence of the contract remains intact.

Conclusion

Independent contracting is becoming increasingly popular given the state of the workforce and shift towards what is being widely coined as the new “gig economy”.

Regardless of which side of the business relationship you’re on, it’s absolutely imperative that you remain adequately informed of your rights and responsibilities in addition to the various rules and regulations set forth by the local, state and federal governments.

It is our hope that you’ve found this article both insightful and useful for your business purposes and we look forward to continuing to bring you more valuable legal-based content to suit your all of your business needs.

What are some interesting insights you’ve gained from this article? Let us know in the comments below!

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