ComplianceLegalFinanceTax & AccountingDecember 30, 2020

Using contracts to avoid misclassifying independent contractors as employees

Employers can use contracts to help avoid having independent contractors and temporary workers classified as employees.

When hiring help for your business, the general categories of types of workers you can hire are employees or independent contractors. If your workers are employees, you have a slew of federal and state laws you are legally responsible to comply with as an employer. Using independent contractors doesn't subject you to the same responsibilities. Therefore, it is critical to prevent independent contractors from being legally treated as employees, so you can avoid some of the legal and financial drawbacks of being an employer. You may be wondering: what can you do to prevent this unwanted result?

What you can and should do is very carefully structure the working relationship so as to limit your control over the worker, and spell out the particulars in a contract.

Whenever you enter into a contract with an agency supplying you with workers or an independent contractor, you must specify who has control over which aspects of the work that needs to be done. Generally, the more control that you have over the employee and the more aspects of the employment relationship that you have responsibility for, the more likely you are to be considered the employer of a employee, even if it's a temporary employee, which can in turn make you subject to certain federal laws and state laws.

While entering into a contract with a worker can assist in defining the nature of the working relationship, what it can't do is create one. You cannot classify an employee as an independent contractor simply by drawing up a contract that puts that label on the relationship. Negotiating a contract with an independent contractor or an agency may help to reinforce the validity of the worker's status as an independent contractor by specifying the details of the employment relationship in case a question arises as to the worker's status.

The federal and state governments place a high priority on preventing the misclassification of workers, and therefore, so should you. The scrutiny in this area is constantly intensifying and is not to be taken lightly due to the penalties and fines that can result for non-compliance with employment and tax laws. Use contracts to ensure that your independent contractors are correctly classified as such and not to attempt to misclassify those who are actually your employees!

Different considerations come into play depending on whether your contract is with a staffing agency or the independent contractor.

Drafting a contract with a staffing agency

Keeping in mind that you will always have to accept some liability, there are several pointers you should be sure to keep in mind when negotiating a contract with an employment or leasing agency.

Here are some basic guidelines to follow:

  • Make the agreement between your company and the other company, not between you and another person.
  • Clearly designate the responsibilities and services of each party — hiring, firing, training, assigning work, making work rules, etc.
  • Carefully draft clauses that protect you from liability for employees and their actions and penalties associated with those liabilities.
  • Specify job descriptions.
  • Indicate situations that will cause you to terminate or prematurely cancel the contract.
  • Delineate all confidentiality requirements you have.
  • Stipulate which party is responsible for payroll, withholding, and payment of taxes for the individuals.
  • Clarify who has primary responsibility for paying and providing workers' compensation insurance and who has the immunity protection.
  • Indicate to what extent employee benefits will be provided by the staffing company and the level of contribution to the benefits offered.

Independent contractor agreements

In contracting with an independent contractor, you should attempt to structure an agreement around a test created by the Internal Revenue Service (IRS) to determine if a worker is an employee or an independent contractor. That test is referred to as the multi-factor test.

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