For small business owners, hiring an independent contractor can seem like an alternative to complicated employee laws, and in fact, it can provide a great deal of benefits, but it is important to remember that there are pitfalls to this type of relationship as well. Small business owners should be aware of government regulations for independent contractors, and the problems that can occur depending on whether the worker should have been classified as an employee instead of an independent contractor.
Often, businesses opt to engage independent contractors verses employees because they are not required to pay employee taxes or offer employee benefits like insurance, workers compensation, or PTO. Perhaps the position is only part-time and the business owner is not looking for a long-term commitment. While the allure of a “no strings attached” relationship may sound enticing, it is important to keep in mind that for every benefit, there is a risk. In order to classify a worker as an independent contractor, a small business owner should minimize the risks by creating detailed documentation of how the relationship is structured. The way this relationship is set up can help to justify their classification as a contractor and not an employee.
Let’s say you hire an independent contractor, the two of you have spoken at length about their responsibilities, each other’s expectations for the relationship, and what you as the owner will or will not be offering in exchange for their help, but you never really got around to officially writing things down and signing a contract detailing those conversations. You don’t document the relationship, and you don’t really have any evidence indicating you hired an independent contractor other than the check stubs. This leaves a lot of room for the independent contractor to become unhappy with the way the relationship was set up. It also leaves the door open for government agencies to come in and question the validity of your independent contractor’s classification.
Without the details being outlined in a written contract, a small business owner will probably find it difficult to protect themselves if the contractor tries to solicit clients, reveals confidential information about the business or its clients (gasp!), or creates intellectual property that they then own and have access to, or creates problems within the business or with its clients. And what about insurance to cover the contractor’s mistakes? These kinds of problems can be very costly to solve but are very easy to prevent.
Detailed documentation can also help support the classification if the contractor gets hurt and wants to claim workers comp (which is only available if someone is an employee), or maybe the contractor is terminated and tries to claim unemployment benefits (which are also only available to employees). When someone files for these employee benefits, government agencies will step in and investigate to decide if the worker was really an independent contractor, or whether they should have been classified as an employee. If a business owner is unable to justify their classification as a contractor, he or she could be fined, plus have to pay back taxes and overtime pay. The government agencies usually spearheading these investigations include the IRS, US Department of Labor, and the Florida Department of Revenue. Each of these agencies monitors worker classifications and has its own list of criteria, but most of that criteria revolve around the level of independence of the worker, and their control over how, when, and where their work is performed.
The possibility of these kinds of investigations coupled with the effort it takes to make sure things are properly documented throughout the relationship with an independent contractor may seem overwhelming, but it is possible for small business owners to correctly classify someone as an independent contractor by creating a detailed written contract that holds the worker accountable and protects the business in many different scenarios. It’s important for small business owners to be familiar with each agency’s classifications for independent contractors and concentrate efforts on documenting their responsibilities and expectations in a strong contract. Done right, hiring an independent contractor can be a great benefit to a small business. It just has to be done right!
We know there is a lot to be considered when hiring an independent contractor and the list of classifications and criteria coming from different government agencies can be overwhelming, so we created a checklist to help make things easier! Download our Independent Contractor Checklist here to help identify some of the pitfalls of hiring an independent contractor and analyze the current structure of how you work with them.