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.

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

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