Keep Independent Contractors Independent

My recent article on the use of Independent Contractors (IC) as a substitution for full-time employment generated some interesting conversation.  I am not surprised, as it is an arrangement that is under greater scrutiny by the IRS.  Many employers and Freelancers are unclear as to the rules governing this relationship. 

As an employer, you have a reason to be careful in this transaction, as worker misclassification can be a costly mistake.  Your company will be at risk to pay penalties and to remit payroll taxes that would otherwise have been paid.

As a prospective employee, you should understand your rights, in the event that an employer wants you to work as an IC.  You should know that you will be responsible for FICA (payroll) taxes which will run about 15% of your gross earnings.

So, how does an employer ensure that an IC does not become classified by the IRS as an employee?  Likewise, how does a prospective employee protect himself from an employer that does not understand the rules?

I consulted with my HR expert, and reviewed IRS Form SS8 to provide some direction.  The advice I received was: “When you can only direct or control the result of someone’s work and not what will be done and how it will be done, then the worker is typically defined as an independent contractor. These are self-employed workers.  For an employee, you control what work is to be done, when it will be done, where it will be done, and how it will be done.”  This seems to be a pretty good summary of the relationship between Employer and IC.  Remember, I am not an attorney and this is not meant to be legal advice.  For further clarification always seek the advice of an attorney. 

Once you have entered into an agreement with an independent contractor, there are a number of IC work habits you must understand to comply with the IRS and other agencies.  The IRS test considers three broad categories: Behavioral Control – who determines how the work will be done; Financial Control – how the IC is compensated; and Relationship with the Employer; - how the relationship is presented to the public.

The following guidelines should be helpful.

Behavioral Control:

1.     The IC performs their work and provides services without your direction.

2.     The IC does not work at your offices unless the nature of the services absolutely requires it.

3.     The IC is not provided employee handbooks or company policy manuals.

4.     The IC establishes his working hours as he determines to be appropriate.

5.     The IC is not given too much work or short deadlines which require them to work full time for you. 

6.     The IC is not provided ongoing instructions or training.

Financial Control:

1.     The IC is not provided with equipment or materials unless absolutely necessary.

2.     The IC is not paid travel or other business expenses directly.

3.     The IC is not given employment benefits.

4.     The IC is not required to give you formal written reports.

5.     The IC is not invited to employee meetings or functions.

6.     The IC not paid on a weekly, biweekly, or monthly basis as you pay employees.

Relationship to the Employer:

1.     The IC is not provided company business cards or stationery.

2.     The IC does not have a title within your company.

3.     The IC is not referred to as an employee of the company.

4.     The IC agreement may be terminated by either party without liability.

5.     The IC may provide similar services for other companies.

6.     Follow the terms of the IC Agreement, including termination provisions.

7.     If the IC is to be given additional work, execute a new IC Agreement

I’ve been told it is not a single issue that decides the question, so one must look at all of the guidelines. 

Working with Independent Contractors is certain to become more important as we transition into the Digital Age.   Establishing a relationship that adheres to the guidelines will minimize the risk to your business.  Follow the terms of the IC agreement, including its termination provisions.  If in doubt, consult an attorney and/or complete IRS Form SS8.

Thank you for visiting my blog.  I hope you enjoyed my point of view and would like to receive regular posts directly to your email inbox. Toward this end, put your contact information on my mailing list.

Your feedback helps me continue to publish articles that you want to read. Your input is important to me so; please leave a comment.

Jim Weber, President
New Century Dynamics Executive Search
Author of: Fighting Alligators: Job Search Strategy For The New Normal

Current Assignments

1. Strategic Partner - Atlanta-based B2B Professional Services Company - Complete
2. Director of Business Development, Atlanta-based B2B Professional Services Company: New
3. Training Director – Southeastern-based Restaurant Group:  New
4. Senior Accounting Manager – Atlanta-based Manufacturer.  New
5. Controller - Orlando, FL-based Restaurant Company:  New

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Strategic Partners: Choose Wisely

Last week I wrote about my consulting assignment to help a client’s business development needs.  I mentioned that we had been working to recruit a Strategic Partner (SP).   In fact, we closed that deal this week.  This new partner is highly experienced in my client’s industry segment and is active in a different geographic quadrant of the U.S.  Additionally the SP has depth in segments my client desires to penetrate more fully.   This partnership seems to have great potential.  My client’s decision to enter into this agreement is  aligned with the direction of the economy.

So what is a Strategic Partner?  SPs may be in business to serve the same target market but not as a direct competitor.  Or, they could be an indirect competitor who serves a different target market.  They may work in a market segment you would like to penetrate, but lack the resources.  They may have expertise your company lacks and vice versa.  Your company may have identified a prospective client who cannot be closed due to a lack of competence in their market segment.  However, if there is a relationship with another company, or contractor who has the needed skills, an engagement may be possible.  An SP can complement your business.

The SPs I have developed came from referrals.  My network pointed me to these folks, initially as a resource for searches.  In my work, as with any consultant, I learn a lot about my client's needs.   It is natural to want to help them solve problems to become more successful.  Their success will ensure a long term relationship and continued success for my brand.  I view this support as value-added.  Having the ability to refer additional resources to help my client becomes a win-win.

Selecting a Strategic Partner is very similar to hiring a full-time employee.  One must do their due diligence to ensure that the candidate has a demonstrated, verifiable track record of success.  The candidate must match your company's culture and values.  They must have an excellent reputation for building bonds of trust.  They must play well with your team.   The past is prologue.  Check their references.  You must employ a thoughtful selection process as the SPs brand will become linked to yours.  The wrong partner will damage your brand.

An SP is a formal business relationship; consult your attorney to document your agreement.    Risk will drive the scope of your contract.  At the very least you will want to have a letter agreement on record.   The term of the initial agreement should be long enough to get a good read on the SP, without suffering a prolonged mistake.   A clause to end the agreement with appropriate notice is necessary.

On quality control, you must exercise oversight.  You cannot dictate how they perform the work; however, you can monitor their progress and outcomes.   Check in with your client on a regular basis.   Secure feedback as to the SP’s performance.  If there are issues, you must be alerted to facilitate corrective action.  You have a brand to protect, so be engaged.

Building one’s business via Strategic Partnerships is about leveraging resources to support a strategic initiative.  It is a real force multiplier.  Strategic Partners can enhance the value of your brand, and if managed well, strengthen   bond with your client.  When you enter into an SP, you are formalizing a relationship  to build a line of business.    You become a marketing resource for your SP, who becomes another source of revenue to your business.   

Strategic Partnerships as a business strategy carries risk, as well as rewards.  Seek win-win relationships.  Properly incentivize, resource, and manage the Strategic Partner.  Choose wisely.  

Thank you for visiting my blog.  I hope you enjoyed my point of view and would like to receive regular posts directly to your email inbox. Toward this end, put your contact information on my mailing list.

Your feedback helps me continue to publish articles that you want to read. Your input is important to me so; please leave a comment.

Jim Weber, President
New Century Dynamics Executive Search
Author of: Fighting Alligators: Job Search Strategy For The New Normal

Current Assignments

1. Strategic Partner - Atlanta-based B2B Professional Services Company - Complete
2. Director of Business Development, Atlanta-based B2B Professional Services Company: New
3. Training Director – Southeastern-based Restaurant Group:  New
4. Senior Accounting Manager – Atlanta-based Manufacturer.  New
5. Controller - Orlando, FL-based Restaurant Company:  New

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