5 Steps for Handling Independent Contractors

5 Steps for Handling Independent Contractors

Small businesses often look for creative ways to supplement their core work force and lower costs. One way to do that is by hiring independent contractors, for example, hiring a cleaning crew to tidy up your office or restaurant or perhaps bringing on an IT expert to manage your Web site. Independent contractors typically work less than full time and do not need benefits. But beware – while it might lower labor costs, calling someone an independent contractor when they’re really an employee can lead to legal hot water. Anna Elento-Sneed, director at Alston Hunt Floyd & Ing, gives these tips to avoid any litigious messes when dealing with outside help.

What’s the difference between an employee and an independent contractor? Sorry, that’s not the start of a joke, and certainly the Internal Revenue Services believes it is no laughing matter. The IRS says, “... an employee is subject to the will and control of the employer not only as to what shall be done but as to how it shall be done.” Employers need to give up their control over independent contractors. “You cannot dictate specific job duties, performance standards, operational procedures and standards of conduct,” Elento-Sneed says. “Moreover, you cannot become involved in the training, evaluating, directing and disciplining the independent contractor or its employees.”


Ask the contractor’s current customers for references. Solicit bids for independent contractors, and keep the bids for your records. Make sure the company is registered to do business in Hawaii. (This can easily be checked at www.ehawaii.gov.) Ask for a general excise tax license number. You can verify with the state Department of Taxation, but no response from the contractor is a big hint that they might not have one, Elento-Sneed says.

On the contract, list the individual’s general excise tax license number and business address. Include an indemnification clause to shield your company from liability. Have the clause specify that the individual is responsible for his or her own employees, and those employees must be in compliance with the law. Limit the contract to a specific time period, and have your attorney review it.

When negotiating a contract, keep an arm’s length. That means making sure it really is a negotiation, where each party benefits mutually from the partnership. Don’t let one side dictate price, scheduling or reporting. Keep records on every transaction and require bills and receipts for services rendered. Even though an independent contractor is classified as such, your company can still be liable for injuring the independent contractor, or for injuring a third party. And remember, don’t tell them how to do their job – degree of control is a vital factor in determining an employee and an independent contractor.

If you have any doubt as to the status of a worker, call a lawyer. Elento-Sneed says it would be “pennywise and poundfoolish” not to consult with a lawyer; lawyers’ fees aren’t cheap, but the cost for legal advice would be miniscule compared to the penalties you’d have to pay if you misidentify your work force. In Martin v. Albrecht, an employer was ruled liable for three years of back wages and an equivalent amount in damages. In addition, any equipment bought by employees during that time period had to be paid for by the employer.

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