Independent Contractors - Liability OR Cost Savings

Why not hire independent contractors to do to the work? It's cheaper, NO more health insurance, social security, unemployment, workers compensation costs! My answer is - Liability! With all of the downsizing, outsourcing, and re-engineering going on, more and more companies are turning to independent contractors. What about the FLSA and IRS regs?

If a worker is considered to be an independent contractor, you DO NOT have the right to control how they do their work. This also means that any work the independent contract performs remains their property unless you specifically identify it as a "work for hire." Any employment agreement that you enter into should be subject to final review by your attorney.

In order to be considered an Independent Contractor here are some of the critical tests:
· The ability to set own hours and determine sequence of work
· Work off-site
· Working by the project rather than having a continuous relationship with the employer; written contracts describing the relationship
· The opportunity to profit and loss (they have skin in the game)
· Being self-employed and holding oneself out as much
· the extent to which the worker has unreimbursed business expenses
· the extent of the worker’s investment; Furnish own tools and training
· the extent to which the worker makes his or her services available to the relevant market
· how the business pays the worker (being paid by the job versus hourly or weekly)
· the extent to which the worker can realize a profit or loss
· does the business provide the worker with employee-type benefits; insurance, pension plan, vacation or sick pay
· the expectation that the relationship will continue indefinitely rather than for a specific project or period
· the extent to which services performed by the worker are a key aspect of the regular business of the company

Behavioral control covers the amount of control the employer has over the worker in terms of where, when, and how the job is done, among other factors.
Financial control dictates how much control the company has over a worker's pay, business expenses, and facility investment.
Relationship type is based on written agreements, benefits, and length of relationship between the company and worker.

For example, independent contractors are more likely to have unreimbursed expenses, be available to work for others in the relevant market, and make a profit or loss. An employee is more likely to have a permanent relationship with a company than is an independent contractor, and an employee is more likely to provide services that are a key aspect of the business.

To learn more about the Independent Contractor Rules - Publication 15A - Supplemental Tax Ruleshttp://www.irs.gov/pub/irs-pdf/p15a.pdf

For IRS help with classifying your workers, you can file Form SS-8, "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding." A business or a worker who would like the IRS to determine the worker’s status can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Form SS-8 requests detailed information which reflects the factors discussed above. Upon receipt of this form, the IRS will seek additional information from all parties who would be affected by the determination by sending those parties a blank Form SS-8 for completion. The matter would then be assigned to a technician who would review the facts, apply the law, and render a decision by sending a formal determination letter to the requestor and a copy to the affected worker (or class of workers). The decision is binding on the affected worker (or class of workers), the business, and the IRS.

Meeting the IRS test is not the only hurdle to determine independent contractor status. Fair Labor Standards Act (FLSA) covers several criteria including if the service requires special skills. If you do decide to go the independent contractor route, then develop a specific contractor agreement and make certain the contractor is insured to reduce your potential risks. Hiring an independent contractor can be the right choice for small companies.

SAMPLE POLICY OF STATUS FOR INDEPENDENT CONTRACTOR
This Agreement does not constitute a hiring by either party. It is the parties intention that Independent Contractor shall have an independent contractor status and not be an employee for any purposes, including, but not limited to, the application of the Federal Insurance Contribution Act, the Social Security Act, the Federal Unemployment Tax Act, the provisions of the Internal Revenue Code, the State Revenue and Taxation Code relating to income tax withholding at the source of income, the Workers' Compensation Insurance Code 401(k) and other benefit payments and third party liability claims. Independent Contractor shall retain sole and absolute discretion in the manner and means of carrying out their activities and responsibilities under this Agreement. This Agreement shall not be considered or construed to be a partnership or joint venture, and the Company shall not be liable for any obligations incurred by Independent Contractor unless specifically authorized in writing. Independent Contractor shall not act as an agent of the Company, ostensibly or otherwise, nor bind the Company in any manner, unless specifically authorized to do so in writing.