Using Independent Contractors | New Rules You Need to Know

By Tom Dushaj

Independent contractors can be a real asset to your business. They can take up the slack when your workload is especially heavy yet it’s not a problem to release them when the workload slows down or when a particular job is completed. They also can often save your company money in that you don’t have to pay benefits, worker’s compensation, payroll costs, and all the miscellaneous expenses that come with an employee.

Once you’ve decided independent contractors are the way to go, you need to know you’re following all the latest rules and appropriate labor laws. Rest assured, they haven’t changed…….much.

Economic Reality

The Department of Labor tried to implement an ‘Economic Reality’ test that would have made independent contracting determinant on whether or not a worker was economically independent of the employer. That’s a pretty easy determinant. It would have made life a lot easier for all the businesses that use independent contractors. It almost passed. Unfortunately, in March, the Biden Administration’s Department of Labor delayed that initiative, and then finally canceled the ruling. So the rules determining independent contractor status are still as ambiguous as ever.

You also probably heard the debate in California primarily concerning Uber drivers and their independent contractor status. It was similarly considered in other states.  Simply put, it had to do with a National Labor Relations Board memorandum which determined Uber drivers to be independent contractors not employees under the National Labor Relations Act.  Individual states can classify Uber drivers and others as employees but it is much harder for them to do so.

Because of these state powers to reclassify workers separately from the National Labor Regulations, it is essential that you become aware of your state’s individual classifications and always consult with your attorney or financial advisor concerning independent contractors.

IRS Guidelines

An independent contractor is:

• You do not withhold taxes. They are responsible for all of their own taxes.
• They bill you for their pay and therefore cannot claim unemployment.
• They have an end date when the job is complete.
• Technically, you can tell them what to do, but not how to do it (because they are their own boss).
• They provide their own tools and supplies for the job.
• The independent contractor has the opportunity for profit or loss.

There are considerations that must be maintained when hiring an independent contractor. For example, you must always have a contract in place. Without one, your company is vulnerable.  Not only to pursue litigation for poor performance related issues, but also to taxing authorities, labor and employment, and insurance companies. They all expect contracts in place that state your contractor is not subject to withholding and benefits. The contract also protects you from the contractor later claiming they were an employee.

This contract should also clearly outline the scope of the work expected, the start and completion dates, and the compensation to be awarded. It’s helpful if the place the work is to be accomplished is also stated. For example, if you are hiring an IT or Engineering professional, you may provide office space for them. If you’re hiring a blogger or a speechwriter for example, it’s more likely they will work from their own home office or space.

Ethics

Consider the ethics of treating similar workers differently. If you have window installers who work hourly and hire independent contractors who are piece workers or are paid one set price for the entire job, you begin to run into the problem of the independent contractors taking breaks or leaving the job whenever they want. That is their prerogative. You have no say over that. Remember, you have the right to tell them what to do, but not how to do it. Even if you explain this to your hourly employees, they will not fully understand it and they will not feel justified in it. They will try to take the advantages they see the independent contractors taking.  You may experience some pushback or resentment from your employees as a result.

Better to hire the independent contractors for an entirely separate job. Keep them separated rather than encourage any sort of insurgence. Peace among the troops is management’s first responsibility.

Yet, don’t let this consideration stop you from hiring independent contractors because they may be exactly what you need to push you through a temporary surge in work or help you with an important project that needs to be completed or delivered in a timely manner. A great example is getting approval for project funding and quickly finding out that you don’t have enough software developers or engineers to build that sophisticated web portal or do some simulation modeling work. The last thing you want to do is find yourself scrambling to find qualified contractors to get this work done. Advanced planning to qualify contractors is always a good business practice.

Independent contractors that come ready to hit the ground running are just the ticket. Just be certain they also come with contracts.

Remote Work

Another consideration to keep in mind given the current landscape of how consultants are being hired is the option of remote or hybrid work (a mix of onsite and remote). Many companies that don’t need to have a contractor onsite are opting for the remote option. This does come with some risk however. If you need to hire an Engineer that needs to be in the plant performing time studies for example, the remote option would probably not work.

As with all things in life, there are some grey areas with independent contractors. That is, the extent to which you reimburse workers for their business expenses. If the contractor has to make a special trip out of town to perform onsite work at another location, do you compensate for time and gas? Technically, such things should be factored into the contract. Reimbursements could be reviewed in a classification dispute. Yet, a generous company, and a small contractor, should work these things out for the sake of maintaining a mutually beneficial working relationship.

Payment

Another very important grey area that you will notice left out of the bulleted points above is payment. There is no IRS rule that say you cannot pay an independent contractor by the hour.  However, it blurs the line between employee and contractor. And this is one of those things that can raise a red flag. There are different types of engagement arrangements that a company can make with a contractor. A ‘milestone’ based engagement, “a project fee’ engagement, and an hourly (Timer & Materials) engagement to round it off. Depending on your specific needs, it may be necessary to come up with a creative compensation alternative. For example, if your contractor comes to the job without the proper tools, you could provide them and then charge them back, subtracting the cost of the tools from the contract. This way, you are no longer providing the tools to the contractor, rather, you are selling them to him. And still staying within the IRS Independent Contractor Guidelines.

Independent Contractors will always be necessary to effectively manage your business. More and more so as COVID changes the structure of the professional working landscape as we know it today. It is important to understand and follow the rules necessary in successfully using them in your business.