Virtual assistants, project managers, graphic designers, event coordinators, bookkeepers, videographers … all kinds of professionals we bring in to provide expertise or just another body to help us grow and get more done.
For years now, the fashionable thing has been to hire these workers as independent contractors. You don’t have all the paperwork, taxes, employee benefits, legal duties, and complexities of an employee – a big administrative burden and financial cost for a tiny business.
But are you just setting yourself up for a problem later?
What if your independent contractor claims that they were an employee? What if they file for for unemployment benefits when you terminate the contract, or if they forget to submit quarterly tax payments and claim that you should have been withholding payroll taxes this entire time?
Yes, you say that you did the right thing and have a written agreement stating that your worker is an independent contractor.
But is an agreement enough to show that your worker is an independent contractor?
Answer – depends upon who is asking.
You see, many different agencies and governments have an opinion on whether your worker is an independent contractor or an employee – the IRS, the federal Department of Labor, the state department of labor (of your state and of your worker’s state), the state tax/revenue department, and even local government.
(Like many things in small business law, it’s a freaking mess.)
There are three different views about independent contractor agreements:
1. Contracts Are a Factor.
According to the IRS (and some states), whether your worker is an independent contractor or an employee depends upon three factors, that “provide evidence of the degree of control and independence” of the worker. This includes behavior (like where the worker is located), financial (like who provides the tools), and type of relationship (such as is the relationship a one-time project or ongoing).
Under this standard, whether there is a written contract goes to the type of the relationship – and since employees usually don’t have written contracts, having a contract goes to show that the worker is an independent contractor. But, it’s just one factor.
2. Contracts Shift the Burden.
In Arizona and Colorado, for example, if you put some “magic words” in the contract, then it is presumed that the worker is an independent contractor. The worker can try to prove later that they are an employee, but it’s a much bigger burden to overcome.
In Colorado, the contract must state “in type which is larger than the other provisions in the document or in bold-faced or underlined type, that the independent contractor is not entitled to workers’ compensation benefits and that the independent contractor is obligated to pay federal and state income tax on any moneys earned pursuant to the contract relationship.” Also, the signatures need to be notarized.
If you or your worker is in one of the states that shift the burden for using magic words, make *sure* to use them in all of your contracts!
3. Contracts Are Not Determinative.
In California, workers are presumed to be an employee. You can overcome this burden by showing evidence of the lack of control over the work and the manner/means in which it is performed, as well as 11 other factors. But, “the existence of a written agreement purporting to establish an independent contractor relationship is not determinative” upon the relationship.
**Reminder: You Should Still Have a Contract!!**
Even if you’re in a state where having a written contract isn’t that helpful, you’ll still want a contract for other reasons. A written contract will state what each party is going to do, what each party is not allowed to do, and the expectations of everyone – so the relationship can go (and end) as smoothly as possible. You will also want terms in the contract to protect your trade secrets and other confidential information, and to protect you whenever the relationship ends (so you can get your materials back, for example).
Bottom line, make sure you research your state (and your worker’s state) to see what it says about independent contractors, and comply with their rules as much as possible. And don’t forget, that sometimes it’s must easier (and less risky) to suck it up and hire them as an employee.