Know what you are doing before you hire an independent contractor (IC). Messing this one up can be a costly legal nightmare.
I promise, I’m not trying to scare you. ICs can be incredibly strategic business partners and fill gaps that you might not otherwise be able to fill. As an IC myself, I obviously find exceptional value in the role. But before you sign a contract, make sure you are informed. Is the work you are asking to be done suitable for an IC? Is the IC set up to legally do contract work?
I don’t think I need to explain how an IC relationship looks if it’s done well. So, here’s an example of an IC relationship gone wrong. A small construction company hired IC workers. They all agreed to an IC relationship and understood that a 1099 would be issued for tax purposes at the end of the year. For a decade, work was booming. Everyone was happy and got along, and the pay arrangement was no problem — that is, until the day a worker fell off the roof and broke his hip.
The worker couldn’t work, so obviously wasn’t getting paid. Since he wasn’t an employee, he also wasn’t eligible for unemployment or workers’ compensation. The worker, not fully understanding, filed an unemployment claim with the State Unemployment Office. When the unemployment office looked up the company and saw no payroll taxes had been paid, they assumed that the company did not have any employees and denied the claim. The employer confirmed this fact to the unemployment office, proudly stating, “No. He is not an employee. He is an independent contractor.” End of story.
Not so fast. Here’s what happened next. The unemployment office met with the worker to ask these four questions — the same questions you should ask yourself any time you consider hiring an IC:
- Did your supervisor tell you when you needed to be at work and for how long?
- Did the company provide the equipment you needed to do your job?
- Did your supervisor tell you what you needed to accomplish during the work day?
- Did anyone supervise your work in any way and tell you if you were doing it incorrectly?
In this example, the answers to all four questions was yes. But even if the answer to just one was “yes,” you likely have an employee, not an IC.
In case this wasn’t enough to worry about, you also need to be sure that the person you are contracting with is truly an IC. Here are questions to help make that determination:
- Do you have your own company?
- Do you carry your own liability insurance?
- Do you provide your own equipment?
- Do you provide a bid or scope of work for the project?
- Is there a specified period for the project and you define what and how you will do it and for what amount of money?
The use of ICs in business is wonderful if done with intention, for the right purposes, and with a solid understanding of the law.