Independent contractors are workers who are not regular employees but who are hired on a temporary basis such as for a particular project or assignment. They are also referred to as consultants or freelance workers. They often have special expertise in operating software, possess unique organizational skills that they can impart to your regular employees or who may be more capable in handling a specific project. When hiring an independent contractor, here are 5 things to keep in mind to protect your business.
Make sure the person you are hiring is an independent contractor. Even though you are paying the freelancer a higher hourly wage or fee, you are saving substantial money in not having to provide health insurance, overtime, training, bonuses or other compensation benefits. You also need not withhold taxes or pay social security or Medicare taxes. However, there are rules on what constitutes an independent contractor:
- You have the right to control and direct only the results of the work performed
- You do not have the right to control how the work is done, what will be done or the method used
- You have the right to terminate the employee at will and without cause
- You are not providing directions to the worker, work hours or number of hours or require the work be done in a certain sequence
- You are not providing the tools, equipment, materials and supplies
- You not provide an office for the freelancer
- Do require that the freelancer issue you invoices
- Do not provide training and make sure the individual personally performs the services
- Hire an individual who offers services to the general public and has a substantial financial investment in the facilities used when performing services
- Be sure you and the employee have a clear understanding of your relationship
Get documentation from the employees that supports their self-employed status since you are increasing your chances of a tax audit when you hire and report independent contractors. Most employers know to file Form 1099-Misc when hiring a freelancer. Misclassifying an employee as a freelancer will lead to the time and expense of an audit and your having to pay the required taxes that your company failed to withhold.
Intellectual property protection is essential. Unless you expressly provide in your employment agreement that any intellectual property the individual creates for you while in your services is your property, it will belong to them. There are certain freelancers who will be very reluctant to agree to relinquish their creations or who will demand heavy compensation such as artists or writers.
Freelancers are not covered by your workers’ compensation policy. If a freelancer is injured on your job site or while performing a task, you can be sued directly. You should include a provision in your employment agreement that they understand and appreciate the risk, if any, in performing the job and have them sign a waiver and release of liability. California recognizes and enforces such waivers so long as they are clear, concise and identifies the risks and parties who are being released. The content may not be too encompassing or too narrow and not in small print. Gross negligence cannot be waived, however.
Know the background and history of the person you are hiring. Do your due diligence in hiring the freelancer or consultant and not rely entirely on the person’s resume or referral from just one person. A freelancer who is obnoxious, offensive or who has a history of harassing people can not only lower morale and productivity in your company, but exposes you to harassment claims if one of your regular employees is sexually harassed by this person.
Before you hire a freelancer or consultant, meet with Pasadena lawyer Andrew Ritholz regarding the issues and legalities involved. He will review the duties and obligations of the potential employee and your responsibilities so that you avoid any missteps and have to endure an audit for possibly misclassifying the employee. Taking the time now to discuss these issues will save you considerable expense and headaches in the future.