HR Corner: Guidelines for Using Independent Contractors

Use of independent contractors should generally be the exception, not the rule. While it may be tempting to classify workers as independent contractors to save money now, improperly classifying workers can result in having to spend large sums of money later (e.g., money damages, fines, penalties, etc.) 

Also, ensure that a worker satisfies independent contractor tests under various laws (e.g., IRS, workers' comp, FLSA, Title VII, etc.), as you never know in which legal arena a challenge may arise. (Conduct a self-audit under all the tests if your company already uses independent contractors.) 

No one factor prevails under these tests; rather, courts will look at all the circumstances. (For example, a contract stating that the worker is an independent contractor is not controlling. Instead, the actual facts of the working relationship will dictate whether a worker is an employee or independent contractor.) 

In questionable cases, you may ask the IRS to help you determine the appropriate classification for a worker. Submit IRS Form SS-8 found at: http://www.irs.gov/pub/irs-pdf/fss8.pdf. Realize that a response may take several months.  

Properly using independent contractors includes correctly classifying them as employees or contractors at the outset. With greater scrutiny being used by enforcement agencies, "getting it right" is more important than ever. Use the guidelines below to keep in compliance and out of trouble. 

If your company is already using independent contractors: 

• Use contractors only for short-term, discrete projects. Do not have them perform work that regular employees also perform.
• Have signed independent contractor agreements. (Seek legal assistance.
• Ideally, contractors should be set up as a business entity (e.g., corporation, LLC, etc.) and should work for others as well.
• Require contractors to provide proof of business insurance. This should include proof of workers' compensation insurance, unless the contractor can show that he or she is exempt from state requirements.
• Require contractors to submit invoices for their fee. Pay on a project (not an hourly) basis.
• Do not provide contractors company benefits (insurance, retirement, vacation) or pay any employment taxes associated with the contractors' work (but make sure they do).
• Have contractors supply their own equipment.
• Allow contractors to determine their own hours and methods of accomplishing the end result.
• Do not reimburse for expenses.
• Make sure the contractor works, at least part of the time, away from your company premises.
• Review your policy against harassment with the contractor and ensure that he/she understands that the policy also applies to him/her.
• Keep files on all independent contractors. Files should include the signed agreement; copies of certificates of incorporation (or other business entity evidence) and applicable insurance coverages; invoices; records of work performed; and evidence of the contractor's business (e.g., business card, advertisements, or photographs of trucks or other equipment with the independent contractor's name on them).