How Independent Contractor Agreements Protect Your Pocketbook

Posted on January 24, 2014 in Business Transactions, Employee Issues

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If you’ve been reading between the lines at all regarding the state of our economy (and, in particular, our government treasuries), you’ll be very much aware that state and local governments need money. Need our money. Need millions and billions and trillions of dollars of it, in particular. In order to avoid bankrupting themselves, governments have to do one of two things:  1. decrease spending and cut expenses (highly unlikely, in light of the proposed programs concerning health care, job stimulus, etc.) or 2. raise revenue.

So how will government raise revenue? One way that state and local governments raise revenue is by more closely enforcing their laws, and levying penalties against those who violate them. If there’s ever been a time as a business to “clean up your act,” now’s the time to do it so that you can keep the government out of your underpants.

A trend I’m seeing in particular is a crackdown on businesses that employ “independent contractors. If your company uses independent contractors to staff its work force, be very careful that you do this properly. You want to be sure to use people who can properly be classified as independent contractors and are not just part-time employees in disguise.

What’s the difference? The IRS has a “test”–a checklist, if you will–20 different factors that it weighs to determine whether a service provider is truly independent, or an employee for whom you should have been paying the legally mandated employment taxes.  In a word, it comes down to control. The amount of control you have over when, where and how the service provider delivers her services will affect which side of the scale you fall on.

“Feh,” you say dismissively.  “I’m a small business. The government deals with hundreds of thousands of them throughout the state– millions throughout the country. How will I possibly pop up on its radar?” Here are just a few of the ways I’ve seen these issues arise:

  • The service provider freelances for you while working full time for another company. When laid off, the service provider lists you as someone she’s done work for in the previous year.
  • You provide an independent contractor with a long-term assignment. Because of the economy and your budget constraints, you need to let the person go. Disgruntled, he files a claim for unemployment benefits.
  • A freelancer gets injured while performing services on your job site.  Somehow, the claim gets filed through Workers’ Compensation.

In all these situations, in ways you do not plan, you might suddenly find yourself on the radar of a government agency whose job it is to track down those who are not in compliance . . . and s-q-u-e-e-z-e you with penalties.

That’s why having a written agreement with your independent contractors can be a valuable weapon in your arsenal against these kinds of claims. (Reviewing the 20 factors with an employment attorney before you hire someone is another).

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