Entrepreneur

Hiring a contractor? Here’s how to avoid the legal headaches

(Editor’s note: Curtis Smolar is a partner at Ropers Majeski Kohn & Bentley. He submitted this column to VentureBeat.)

A reader asks: My company wants to use an engineer as an independent contractor.  How do we establish an independent contractor relationship?

Answer: Because of recent abuse of the independent contractor classification, there’s a lot of scrutiny these days by the IRS – as well as state and local government agencies. To make sure you’re in the clear, have this person sign an “independent contractor’s agreement.” This will define and help manage the relationship as well as spell out specifically what this engineer (or any other contractor) needs to deliver.

While it may seem obvious, it’s important to understand the legal definition of what an independent contractor is.  A person in this role only represents the employer as to the results of his/her work and not the means and methods of accomplishing the work.

If a worker is classified as an independent contractor, the employer may not be responsible for liability for lawsuits filed against the contractor, employment issues, tax issues or statutory liability (e.g. ERISA and NLRB).

Because scrutiny is running so high, it’s important to know what the IRS (and others) may examine to determine whether your relationship with this person constitutes employment or independent contractor.

Someone looking at the relationship between your company and the worker will generally evaluate how much control your company exerts over the contractor.  The more control the company can exert over the individual, the more likely that person will be considered an employee.

For example, if you can tell the contractor when to be at the office or that he/she needs to use your computers, that may be too much control. Additionally, does the company have the right to control the financial aspects of the workers job (such as reimbursement of expenses, opportunity for profit or loss, significant investment in work)? In short, the less you tell your contractor how to do their job, the better.

Intent is also important. Lawyers look at whether the parties intended there to be an employer-employee relationship or whether there was an intended independent contractor relationship.  For evidence of the intent, the IRS may look at whether the worker is getting benefits from the company and/or whether there is a written independent contractor agreement.

Your independent contractor agreement should specify at a minimum:

  • that they are an independent contractor, not an employee
  • that the contractor is in control of the means of producing the product
  • financial independence of the contractor
  • the fees
  • deliverables
  • timing
  • who owns the end result of the work
  • that they have insurance
  • confidentiality

It should also state very clearly that the contract is “an Independent Contractor Agreement.”  Including that language in the title of the document will minimize any doubt as to the intent.

It’s a single document that can save you a lot of trouble. You can find a generic sample Independent Contractor agreement here.

Startup owners: Got a legal question about your business? Submit it in the comments below or email Scott directly. It could end up in an upcoming “Ask the Attorney” column.

Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.


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