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Who is Considered an Independent Contractor

Guest post by: Lu Vorise Dahlman

Article Overview: An independent contractor is not legally considered an employee of a small business however; because of this classification, the rights and responsibilities that the small business owner has toward the independent contractor are different for those responsibilities he or she has for individuals classified as full or part time employees of the business.

Who is Considered an Independent Contractor

Independent Contractors

Classifying a person as independent contractor usually reduces the small business owner’s exposure under laws and regulations governing the employment relationship and requires a 1099 contract to be in effect.

An independent contractor is not legally considered an employee of a small business however; because of this classification, the rights and responsibilities that the small business owner has toward the independent contractor are different for those responsibilities he or she has for individuals classified as full or part time employees of the business. For example, non discrimination laws apply to the employer and its employees, but not to its independent contractors.

In exchange for using the advantages independent contractors provide, the employer substantially loses the rights to control the contractor. While the employer can still control and expect results however, the employer cannot dictate where, when, or how work is to be done. Thus, the employer loses control over the work processes, tools, and work schedules by which the work is performed. The demarcation between what constitutes an employee versus an independent contractor can be ambiguous. For example a person is more apt to be considered and independent contractor when:

•A 1099 contract is involved and defines the relationship between the business owner and the contractor.
•Submission of an invoice for payment for services rendered to the business owner for payment.
•Usually has established a Federal Employer Identification Number (FEIN).
•Responsible for his or her payroll taxes
•Work on a project with a definite completion date.
•Setting one’s own hours
•Possessing a high degree of skill
•Using ones own tools, materials and office
•Working on relatively short projects

The above examples are based on common law interpretations and on a list of 20 criteria used by the Internal Revenue. Misclassification of people as independent contractors can result in substantial tax liabilities and fines for the small business owner. When in doubt always consult an employment attorney.

Source: Staffing Organizations and www.eeoc.gov

MZ LV

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Article Tags: common law, completion date, demarcation, discrimination laws, employer identification number, employment relationship, federal employer identification, federal employer identification number, independent contractor, independent contractors, internal revenue, laws and regulations, own tools, payroll taxes, rights and responsibilities, small business owner, substantial tax, time employees, work processes, work schedules



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Re: Template of Service Agreement/Contractor Agreement - Shimmy- I, too, would be happy to share my template contract for a service provider. But beware, a template agreement may not be sufficient to properly address your needs. Some key differences between Employees and Service Providers: 1. Tax Status. Employers are responsible for withholding tax on employee's earnings. Independent Contractors are responsible for reporting their income/taxes. There is a significant reporting burden and liability associated with this. 2. Confidentiality/Intellectual Property. Often times, employee handbooks will specify an employees confidentiality obligations and many states impute a duty of loyalty. Contractors are under no such obligations absent a written agreement. Same thing for IP/Creative works. The copyright Act draws a sharp and significant distinction between employees and contractors when it comes to ownership of creative works. 3. Liability for tortious acts. Generally an employer is liable for the tortious acts of its employees under the theory of respondeat superior. An entity hiring a contractor may/may not be liable, but without a written agreement for the contractor to indemnify/defend the hiring entity, their may be little recourse against the contractor. There are many other subtle differences too numerous to mention. I hope you find this helpful.
Re: Template of Service Agreement/Contractor Agreement - [quote="Dave_Adler":21fe7egl]Shimmy- I, too, would be happy to share my template contract for a service provider. But beware, a template agreement may not be sufficient to properly address your needs. Some key differences between Employees and Service Providers: 1. Tax Status. Employers are responsible for withholding tax on employee's earnings. Independent Contractors are responsible for reporting their income/taxes. There is a significant reporting burden and liability associated with this. 2. Confidentiality/Intellectual Property. Often times, employee handbooks will specify an employees confidentiality obligations and many states impute a duty of loyalty. Contractors are under no such obligations absent a written agreement. Same thing for IP/Creative works. The copyright Act draws a sharp and significant distinction between employees and contractors when it comes to ownership of creative works. 3. Liability for tortious acts. Generally an employer is liable for the tortious acts of its employees under the theory of respondeat superior. An entity hiring a contractor may/may not be liable, but without a written agreement for the contractor to indemnify/defend the hiring entity, their may be little recourse against the contractor. There are many other subtle differences too numerous to mention. I hope you find this helpful.[/quote:21fe7egl] I was thinking these same points as I was reading the earlier posts. I've been working with independent contractors for years - first as one, and then hiring many of others. These are three of the key things to be sure you include in your agreement. If they are truly an independent contractor, they are reasonable to handle their own taxes. I always include a confidentiality clause and very few have tried to break it. Liability can be a huge issue, depending on the sort of business you are in. In the US - there are all sorts of tax rules for state and federal government to distinguish if a person is or is not an independent contractor. If you make the wrong choice there are all kinds of penalties to be paid. Another thing that should be considered is that your business worker's compensation and/or liability insurance may have to cover these people. I know in construction, I'm charged for any independent contractor and their employees if they don't have their own insurance. That can get really pricey. If you're in a similar situation, talk with your insurance company, some will allow an independent contractor to sign an agreement that they will waive your responsibility to insure them. You would still need to pay for their employees, but it does save some money during an insurance audit. Chris


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