Separating Employees from Independent Contractors

Independent contractors refer to a separate person, business or corporation that provides goods or services to another entity under the terms of a specific contract or through verbal agreement.
Independent contractors usually operate through a limited liability company and are usually paid in a freelance basis.

Some occupations where independent contractors are common are:

  • General contractor
  • Taxi cabs and limo drivers
  • Courier
  • Newspaper carriers
  • Stockbroker
  • Private security
  • Lawyers
  • Doctors
  • Author
  • Personal trainer
  • Professional sports

Independent contractors should also be differentiated from employees. Unlike an employee, an independent contractor does not work regularly with an employer.
Employers do not have the right to supervise or monitor the process by which the contractor delivers his service or goods. The employers can only direct the end result of the work.

Although each state may have different policies with regard to separating independent contractors from employees, the following standards are usually common:

  • Independent contractors are not required to follow specific methods or processes for completing work.
  • Independent contractors can hire assistants to complete the job.
  • Independent contractors can provide goods or services to several other companies.
  • Independent contractors have an independent contractor agreement with the employer.
  • The business relationship is often short-term.
  • Independent contractors may invest in equipment and facilities to complete a job.

Inability to separate employees from independent contractors could have dire consequences come tax season.
An employer who misclassifies an employee as an independent contractor can be charged a huge fine and would end up owing the IRS all back taxes with penalties ranging from 12-15% of the owed.
To avoid this problem, an independent contractor agreement should be signed between the employer and the independent contractor.
An independent contractor agreement should cover all the aspects of the relationship between the employer and the contractor.

Key provisions that should be included are:

  • Verification of employee-contractor relationship – One of the most important benefits of independent contractor agreements is helping ensure that the line between an employee and an independent contractor is never crossed.
  • General information – These should include the duties, terms of payment and the provisions on who will be shouldering the expenses and who will be providing the supplies.
  • Invention ownership – The employer could include provisions that inventions that the contractor developed for the company is owned exclusively by the company and the contractor does not have the right to market or use the invention for other companies.
  • Non-disclosure agreements – Employers should require independent contractors to sign an NDA to ensure that any information or resources that are confidential will not be shared by the contractors to other parties.
  • Licenses and permits – Specify that the independent contractor has the necessary licenses and permits to operate and provide services.
  • Termination and Dispute resolution – The agreement should specify what are the terms that would terminate the agreement and what is the preferred resolution process for resolving disputes.

To ensure that the independent contractor agreement has covered all bases, make sure that you get the help of an experienced employment attorney in creating the draft.

This Article is provided as a free informative service to Fakih Law’s clients and friends.  The Article is for general information only and should not be used as a basis for specific action without obtaining further legal advice.


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