DISCLAIMER: This post provides general information about worker classifications. It does not contain legal advice. Before you begin using an independent contractor agreement, we recommend you consult an employment attorney in the jurisdiction(s) where the contractor will perform the services.
As your business grows, you will inevitably need help doing all the work. Sometimes you will need an expert to do a limited-term project. At other times, you will want someone who can do a lot of ongoing tasks necessary to keep delivering products and services to your clients. When do you need to hire an employee versus an independent contractor? What provisions need to be in the contract? What else do you need to know? Below are general answers to these questions. We recommend you consider these when discussing the terms of the services agreements with the workers who will perform the services. After you have a list of terms you agree upon, you would also be wise to review them with an employment or small business attorney before finalizing the agreement.
Independent Contractors Are Typically for Short-Term Projects
In its simplest form, an independent contractor is an independent business with a contract to perform the services it intends to provide you. The business can sometimes be a sole proprietor (a person), but there are often “red flags” of worker misclassification in these situations. In New York State (NYS), the Internal Revenue Service (IRS), Departments of Labor (DOL), and Workers Compensation Board (WCB) scrutinize these relationships more heavily when:
- The independent contractors are individuals operating under their personal names, rather than doing business as (dba) a trade name
- The independent contractors’ pay is reported under a social security number (SSN) instead of a tax identification number (TIN) or employer identification number (EIN)
- The nature of the services provided are ongoing, not highly-specialized, and are typically provided by employees in similar businesses (e.g., administrative, clerical, customer service-related, sales)
Workers Are Usually Employees When They Work on Many Tasks on an Ongoing Basis
There are still several small business publications and advisors that encourage owners to build their organizations with independent contractors instead of employees. They allege this is a lesser risk and at a lower cost, which is not always true. If you are going to have any workers in NYS, you need to classify your workers carefully. Entrepreneurs are frequently surprised by the costs of worker misclassification:
- Tens of thousands of dollars in penalties for not having workers compensation, disability, and Paid Family Leave insurance for workers the WCB declares employees
- Thousands of dollars in unpaid payroll taxes, penalties, and interest when misclassified workers seek unemployment insurance benefits
- Tens of thousands of dollars in back pay and “liquidated” (punitive) damages for failing to pay for all hours worked or overtime wages
The Contract is a Memorialization of the Terms Agreed Upon During the Negotiations
Over the years, we have negotiated many contracts and mediated disputes about others that fell apart. Almost always, one of the parties signed “a standard agreement” drafted by the other party. The written agreement contained terms that had not been discussed during the negotiations, and the signing party was too afraid to ask why they were included. They didn’t want to kill the deal, so they ignored their concerns–until the relationship broke down.
Sometimes the benefits of the contract, even with its imperfect terms, outweigh the risks and you will sign the agreement any way. Before you do, consider:
- What do the added terms tell you about how your business collaborator will treat you during the relationship?
- Are you being treated as an equally savvy business owner or an employee with little control?
- How confident are you that you can have a B2B conversation when there are challenges or delays?
Terms Recommended for Independent Contractor Agreements
Remember, these agreements are between two business owners. The first paragraph should identify the full legal name of each business, including any entity designation (e.g., Corp., Esq., Inc., LLC, M.D., P.C., PLLC). Other basic provisions that keep the rights and obligations clear include:
- Purpose – What services will be provided? In exchange for what (e.g., money, product, services, equity)?
- Timing – When does the agreement begin and end?
- Termination – How can the agreement be terminated, if it needs to be before the end?
- Payment – How much will be paid, in what format, and when?
- Performance – What services will be provided? What is required for the services to be acceptable?
Depending on the nature of the services and the types of work each business does, additional provisions might need to address confidentiality of business processes and intellectual property, non-solicitation, non-competition, non-disparagement, and dispute resolution.
Common Errors in Independent Contract Agreements
The most common errors we see in independent contractor agreements are terms that look like those required of employees. An independent contractor agreement should not include policies on:
- Required work hours or attendance
- Assigned work location(s)
- Vacation, sick pay, or Paid Time Off (PTO)
- Mandatory training
There are occasional exceptions to these general rules, which is again why we recommend you review your agreement with an employment or small business attorney, if not both.