How to Hire An Independent Contractor
Entering into an independent contractor agreement can be quite beneficial to both the worker and the company. Hiring an independent contractor means fewer burdens and formalities than hiring an employee. More freedom exists for both parties to initiate or cancel the relationship. Independent contractors typically use their own equipment and are independently certified or qualified to perform the services, which means less training obligations for the company. Furthermore, an independent contractor retains the right to provide services for any other business that enlists him or her. Sounds like a win-win, doesn’t it?
Well, despite the advantages of hiring an independent contractor, there is still some risk involved. If a court determines that your company has treated the worker as an employee rather than an independent contractor, your company will be required to pay additional benefits, workers compensation, taxes, and overtime pay for the individual. So how does one stay on the right side of the independent contractor rule? We’re glad you asked!
Note: New York employers! There has been an update to your local laws that affect your relationship with independent contractors, Read more below.
1. Know the Test
An independent contractor’s status is primarily determined by the extent to which the worker and the company are economically dependent on each other. The following “economic realities” test outlines factors relevant to determine whether a person qualifies as an employee or an independent contractor:
- Work performed. An individual that performs work integral to the employer’s business favors employee status.
- Worker’s opportunity for profit or loss. Whether the worker’s managerial skill affects the worker’s opportunity for profit or loss. If it does, that effect on the opportunity for profit or loss favors independent contractor status.
- Source of Instrumentalities and Tools: How much the worker invested relative to how much the employer invested. A worker may be considered economically dependent on the company, if the company invests significantly more than the worker in supplies and equipment—this favors employee status.
- Skills and initiative. A worker with special skills and initiative relating to the work performed shows economic independence, which favors independent contractor status.
- Duration of parties’ relationship. The length of time for which the services are to be performed. A permanent or indefinite relationship between the company and worker favors employee status.
- Control. The individual must have the right to control and discretion as to the manner in which he or she performs the services.
No single factor is determinative; rather, the factors are weighed as a whole in an effort to determine the worker’s status. For example, Uber and Lyft drivers connect with clients through technological platforms provided by the companies. These drivers have generally been considered independent contractors, because they provide and manage their own vehicles, create their own schedules, are paid directly from clients, are not performing the essential function of the company (this point is hotly debated), and often perform the service for multiple companies. However, the more economically dependent the company and worker become on one another, the more likely a court is to follow the presumption of employee status.
For example, a court recently ruled an Uber driver was an employee because she worked exclusively for Uber, she performed a service that generates virtually all of the company’s revenue, and she was subject to certain company controls like background checks and technology service requirements. While this ruling is still very controversial, it shows how delicate the tipping point can be in an independent contractor analysis.
2. Follow These Tips
In light of the national trend to rule in favor of employee status, your company should stay keenly aware of the relationship maintained with any independent contractor.
Keep in mind these tips when your hire an independent contractor:
- Hire an individual independently licensed or certified to conduct the particular services, or
- Hire an individual customarily engaged in these services for other businesses, and
- Specify the individual’s duties and payment in an independent contractor agreement.
- Do not supervise or direct the worker.
- Do not delegate work considered a regular and essential part of your business.
This boils down to maintaining the “independent” in “independent contractor.” The focus of your relationship with the worker should always be on preserving that independence. Prior to commencing a business relationship with an independent contractor, it is wise to consult with legal counsel to ensure the contract and services are consistent with currently evolving legal developments.
3. Get it in Writing
It is also wise to get the terms of the agreement in writing. This is important for the following reasons:
- A writing clarifies the terms of the agreement and forces both parties’ review. This eliminates misunderstandings or incorrect assumptions from the start.
- An oral discussion about the terms of the agreement is hard to remember, by putting it in writing both parties may conveniently reference the terms in the future.
- An employer appears more professional when it memorializes the working relationship.
One last tip—anytime a business pays an independent contractor $600 or more in a fiscal year it must complete a 1099-MISC form. This requires an employer to complete two 1099 forms—one for the company to file for its own taxes and another for the independent contractor to file with his or her taxes.
New York Update
Effective May 15, 2017, New York law increased the regulations for employer relationships with independent contractors by enacting the “Freelance Isn’t Free” Act (the “Act”). To solidly and add to the content of this article and its recommended “best practices,” the Act provides the following:
- For jobs amounting to $800 or more, the contract between the employer and the independent contractor must be in writing;
- Independent contractors must be paid in a timely and complete manner (i.e. within 30 days after the completion of the work, unless the parties provided otherwise in their agreement);
- The Act prevents employers from retaliating against an independent contractor for he or she exercising rights under the new Act; and
- Failures to abide by the Act will result in civil penalties (more on that here).
The Act, however, will not apply to would-be independent contractors that are sales representatives, lawyers, and medical professionals. Bearing all this in mind, New York employers should be sure to review the Act and its applicability to their businesses. Remember, folks, stay complaint!
Revised by: Zachary Avina – 05/24/17
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Disclaimer: Although this article may be considered advertising under applicable law and ethical rules, the information in this article is presented for informational purposes only. Nothing herein should be taken as legal advice and this content does not form an attorney-client relationship. If you would like further information, Wilkinson Mazzeo would love to hear from you, so please feel free to reach out with any questions!
Photo Credit: Phillip Harder