How to Protect Your Business for Future Succession, Part Five: Using Independent Contractors

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A couple weeks ago, I asked you to consider whether your business is susceptible to employee risks. A popular alternative to hiring employees is entering into agreements with independent contractors. There are both positives and potential risks involved with utilizing independent contractors, and I want to be sure you are thoroughly informed before you staff positions within your company.

Advantages

There are several reasons a business owner might decide to staff their company with independent contractors. Perhaps, it is to simply save some money. Independent contractors might cost you more in hourly wages, but they don’t require the costs of benefits, an office space to keep them, equipment for them to use, and other contributions such as Social Security and worker’s compensation insurance.

Another reason a business owner might like to utilize independent contractors rather than employees is to work under a more flexible business structure. If the workload for your particular business fluctuates often, it will be more economical and efficient if your turnover for workers happens through independent contracts rather than employee turnover. Moreover, your independent contractors are likely to be specifically trained and experienced in the work they do for you, making your need to hire and train employees a worry of the past.

I’m not just here for business advice, though; I’m here to point out the legal threads that run throughout your business structure. Legally, there is a reduced risk of exposure to liability if you have agreements with independent contractors than if you hire employees. Employees, by definition, are protected by specific state and federal laws. This increases the possibility of legal action being brought against you by an employee due to violation of rights. Though we hope to be conducting our businesses in the most ethical and legal way, employee rights can come up against business practices and, in consequence, you as the business owner.

Some of the rights for “at-will” employees that you wouldn’t need to navigate with independent contractors are:

  • the right to receive at least the minimum wage and possible overtime compensation at a one-and-a-half rate,
  • the right to form a union, and
  • the right to quit before the work is completed.

Obviously, the laws that protect these rights for employees are here for a good reason. However, as a business owner, your agreement with an independent contractor is a common-ground to run your business efficiently with limited risks.

Disadvantages

Entering into agreements with independent contractors does not come without disadvantages and risks, however. You will have less control over the quality and quantity of work due to an inherent autonomy that independent contractors have. Employees, who agree to all the details of your business practices upon being hired, can be closely monitored. Independent contractors will essentially be free to work at their own pace, do things their own way, etc. Also, since independent contracts yield quick turnover, you may experience a significant level of disruption in your day-to-day business by having to account for the comings and goings of each contractor.

Now, for the fun part: legal risks that come with hiring independent contractors.

  1. Written Agreements. If you do not have written agreements with people who are contracted to work for you, then put that on your very urgent to-do list. I am faced too often with my clients suffering the consequences of simply shaking hands with a person doing work for them. Even if this contractor is your best friend, or even your spouse, do not go for too long without putting a written agreement in place where you describe some of the most important policies to your business: work flow expectations, rate and amount of pay, non-disclosure or non-compete clauses, termination of relationship, etc.
  2. Many businesses that hire contractors are businesses where workers are exposed to the possibility of injury. Since independent contractors are not covered by your worker’s compensation insurance, independent contractors must be required to maintain their own coverage, or an injury may lead to a lawsuit against you for the contractor to recover damages.
  3. Depending upon your business type, you may be hiring contractors to create work that can be copyrighted, such as writing or creating graphics, then your company may not own the copyright on the work done by the contractor unless you have a written agreement specifically signing that ownership over to you.
  4. State and federal agencies, including the IRS, favor the traditional employer/employee relationship or the less than traditional business relationship with independent contractors. In addition, the insurance company providing your workers’ compensation coverage has the right to audit your books and records on an annual basis. In either case, if you do not have sufficient information to evidence your business relationship with your independent contractor (e.g. written agreement, insurance certificate, etc.) that person will be deemed an employee and you will incur unexpected liabilities in taxes, penalties, interest or additional premiums.

As a small business attorney, I am in the business of educating you about your risks and helping you to minimize them before it is too late. If you want more information about how to minimize these risks with your independent contractors, don’t hesitate to contact me as soon as possible. Prevent problems now, so that you don’t have to recover from them later.

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