How to Maintain Independent Contractor Status

The line between employees and independent contractors can sometimes be hard to determine if you don’t know what to look for. Employee misclassification comes with severe consequences, such as fines and back payments. Our guide will walk you through the best practices that companies can employ to help maintain the status of their independent contractors.

Objective:

• To protect both contractors and those who hire them by implementing practices that will help maintain independent contractor status.

Entities:

• Limited Liability Companies
• Corporations
• Non-Profits

Perhaps the best way to prove a worker’s status as an independent contractor is to have an independent contractor agreement. This agreement specifies the worker’s independent status, as well as other important parts of the working relationship, including:

Payment Terms

In addition to the terms of payment, your independent contractor agreement should clearly state that the company will report their earnings to the IRS using Form 1099 and that tax withholdings are the responsibility of the worker.

No Benefits

Specify that the independent contractor will have no employee benefits. It isn’t enough for this to be implied – it should be recorded in your agreement.

Not an Employee

Independent contractors, by their very definition, are free to work for other companies or individuals if they so choose. Acknowledgement of this fact should be included in your agreement along with language defining their status as an independent contractor. You’ll want to mention that they’re responsible for their own expenses, too.

Duties

An independent contractor’s status is heavily determined by their specific duties. Contractors are usually involved with one-off or short-term “ancillary” projects. This means that their work isn’t critical to the business’s daily operations.

Confidentiality

If any trade secrets or other proprietary information are going to available to the contractor, then a confidentiality provision is essential to your independent contractor agreement.

Indemnification

Including an indemnification clause in your agreement will protect you from liability and compensate you for any damages that result from the contractor’s negligence or poor conduct.

Independent contractors, as the name implies, have more control over their work than in an employer-employee relationship. You’ll face an uphill battle if you try to classify closely supervised workers as independent contractors.

Supervision

You can’t manage your contractors in the same way that you would your employees. This means letting them decide on how the job should be done without micromanagement, supervision, or constant evaluation. Discussing fees, benefits, or employment opportunities with your contractor is forbidden, too.

Finite Duration

While the timeline for a project’s completion rarely matches the reality, having an estimated duration and projected end date for the job strengthens a contractor’s independent status.

No Training Needed

It’s a bad idea to provide training for our contractors. More often than not, courts find that training is a key element of the employer-employee relationship.

In addition to supervision and management, there are a few other areas where your independent contractors will require special treatment in order to legally separate them from your employees.  

Don’t Mingle Employees and Contractors

Keep interactions between your employees and contractors to a minimum. This means that you should avoid including them in company functions, such as meetings and group training. Unfortunately, no matter how well you get along with your contractor, this includes social functions like holiday parties, too.

No Handbook

If your business has an employee handbook, don’t give it to your independent contractors. Instead, draft a different manual for contractors to inform them of important company policies concerning sexual harassment, violence, and security procedures.

No Employee Badges or ID Cards

Don’t provide our contractors with employee badges or ID cards, either. While this is standard policy for many businesses, doing so threatens the validity of their independent status.

No Non-Compete Provisions

This bears repeating: unlike employees, contractors cannot be forbidden from taking on other jobs. This is what the “independent” part of “independent contractor” is all about. In other words, asking them to sign a non-compete agreement is not allowed.

Proprietary Information and Trade Secrets

If your company has confidentiality agreement that employees are required to sign, then you won’t be able to use that same document for your independent contractors. However, as stated above, you can include confidentiality provisions in your independent contractor agreement. Another alternative is to draft a separate nondisclosure agreement just for your contractors.

Separate Communication Channels

Avoid CC’ing or otherwise including your contractors on any company-wide emails, announcements, or memos addressed to the company’s employees. Unless absolutely necessary, they shouldn’t have their own company email address, either.

Distinct Roles

It’s important to avoid the temptation to have your contractor work on employee-related tasks and vice-versa. Doing so blurs the line between employee an independent contractor in the worst way. Give them their own workspace, too, if you can.

We’ve already mentioned that contractors can’t be included in company benefit plans. However, you should make sure that this is mentioned explicitly.

Exclude Independent Contractors

In addition to not applying to independent contractors, make it a point to state in your benefit plan that it does not apply to contractors and other temporary works. Do the same for your vacation, sick, parental, and other paid leave policies.

Eliminate Potential Loopholes

Be careful that your plan doesn’t have any technicalities or other loopholes that contractors could take advantage.

Protect your business and your interests. Contact us for an independent contractor agreement either online or by calling us at (727) 279-5037. We look forward to hearing about your next project.