Independent Contractor Agreements

So, you own a business and want to hire independent contractors instead of full or part-time employees?

Some business to this to avoid paying the costs associated with state and federal tax withholdings, providing healthcare and retirement plans, workers’ compensation, and unemployment insurance. However, the IRS has tangled with businesses for years about worker “classification.” You can’t simply call someone an independent contractor in order to save money–even if they agree to it. A company that misclassifies someone who performs as an employee by designating them as an independent contractor could face liability for unpaid taxes (plus interests and penalties), unpaid wages and/or overtime, and more.

Classify the Worker in Writing

To help avoid such misclassification, you should use a written independent contractor agreement for any worker you want classified as an independent contractor. Having a formal independent contractor agreement in place helps resolve questions of worker classification in your favor. If after analyzing IRS Guidance, including their promulgated Common Law Rules and Form SS-8, you feel your worker is indeed an independent contractor, then, among other things, an effective independent contractor agreement must:

  • Refer to the worker as a contractor
  • Refer to payments as “contract payments,” or “fees,” but not “wages” or “salary”
  • Not prohibit the worker from working on other projects
  • Not require work on a full-time basis
  • Not require work at specific times of day or for specific lengths of time
  • Generally and most importantly, show that the contractor, not the company, has control over how work is done

The contract term should also be restricted rather than open-ended, and payment should be due either upon completion of the project or at certain established points during the project. And of course, you must live up to the contract for it to protect you! In short, you must treat a contractor like a contractor, and not like an employee.

Use Government Agency Language

Additionally, there are certain agency words and phrases that should be included in the independent contractor agreement that indicate your intent to establish an independent contractor relationship. A good starting place to find those buzzwords is in the IRS 20 Factor Test. These factors take into consideration behavioral control, financial control, and relationship of the parties (“Common Law Rules”).

Other helpful words and phrases can be found in the “economic realities test” used by the Department of Labor for challenges to worker classification under the Fair Labor Standards Act. This test basically considers whether a worker is economically dependent on the hiring company or economically independent and in business for themselves.

The EEOC uses a multi-factor test that focuses on the company’s “right to control the manner and means by which the work is accomplished.”

Although there are no bright-line rules that apply to every type of independent contractor situation, the prevailing factor in classifying a worker is the degree of control the company has over the individual’s work. Therefore, an independent contractor agreement should specifically describe the work to be performed, but not dictate how it should be performed.

Contact Lieser Skaff Alexander for assistance with drafting an effective an independent contractor agreement.