Are You Treating Your Contractors Like Employees?

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When you’ve got independent contractors doing work for your business, it’s important not to treat them like employees.

Why?

If your contractors are reclassified by the government as employees, you’ll likely pay a fortune in back taxes, penalties, and to your accountants and attorneys trying to clean up the mess.

Here are three things you can do to limit your risks when it comes to contractors.

1. Give up control. One of the fundamental differences between a contractor and an employee is that the latter has a boss managing how things are done. On the other hand, if your work is truly independent, they control getting the work done but have to deliver to your specifications. No micromanaging.

2. Get rid of employment language. Don’t use terms like “employment,” “hire,” “fire,” etc. when referring to your relationship with the contractor. Replace with phrases like “contract with,” “terminate the agreement,” etc.

3. Use a written independent contractor agreement. An experienced business attorney can prepare a custom template agreement you can use with your contractors that’s designed in part to make it clear the workers are not your employees.

If you need legal help with your independent contractor agreements or advice on how to deal with your contractors, it’s time to book a phone consultation with Business Attorney Mike Young.

Why “Hire” Is A Four-Letter Word

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hire independent contractorWhen you search for individual freelancers to do work for your business, wash out your mouth with soap every time you say the dirty word “hire.” Because you should never hire an independent contractor.

What’s the problem?

The term means “employment.” When you “hire” an individual, you’re getting an employee, not an independent contractor.

Why is that important?

  • Are you registered to do business in the state where the freelancer lives?
  • Are you paying into the government worker’s and unemployment compensation funds?
  • Are you doing payroll tax withholdings? And making employer FICA contributions for Social Security and Medicare?
  • Does the freelancer live overseas? If so, are you setting yourself up to pay an extra month of salary each year. Because many countries require 13-month pay.

Avoid using “hire,” “employ,” or other dirty words unless you want an employee.

Instead, use “contract with,” “select,” “retain the services of,” etc. to procure the services of an individual freelancer.

Experienced business lawyers prepare independent contractor agreements to prevent employment. Yet business owners should stop referring to those workers using employment terms like “hire.”

Should Your Business Avoid Having Workers Based In California?

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california ab5 workers regulationsUnless your company already does business in California, you should avoid having workers based in that state.

Here’s why…

California AB 5  – Many Contractors are Reclassified as Employees

California Assembly Bill 5 (AB 5) essentially shifted the burden to business owners to prove a worker isn’t an employee. And made it hard to meet that burden.

The law provides in part, “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

Why is that important?

Because if you’ve got an employee working for you in California, you get all of the regulatory and tax baggage that comes with that.

If your company is located elsewhere, you get to register as a foreign entity doing business in California (and pay taxes accordingly).

You also are likely to get hit with penalties for the years you’ve been doing business in the state but didn’t register your entity.

Plus you’ll get to deal with employer withholdings for Social Security, worker’s compensation, unemployment compensation, and any “entitlements” the State of California decides to impose on your company.

At some point, you can expect California’s government to mandate you fill your management positions based on “social justice “ criteria unrelated to skill or performance.

Of course, the government also has no problem stopping workers at the drop of the hat for COVID-19. Who knows what the next reason will be to shutter business? And you can’t count on being exempt from whatever comes down either.

In short, it’s just not worth the downside of using California-based workers unless you’re already stuck in that trap by doing business in the state.

Exemptions From California AB5 For Some Workers

In September 2020, California’s Governor signed a new law that carved out exemptions for freelance writers and certain other workers (e.g. youth sports coaches) from AB5. It’s California Assembly Bill 2257 (AB2257)

But you can’t rely upon piecemeal exemptions like this to protect your company when it’s the policy of the state to loot your business (no matter where you’re based) in order to prop up a social welfare state that’s insolvent.

An experienced business contracts lawyer can help you avoid traps like the ones California sets by preparing the right type of worker agreements that protect your company. And advising you on business-friendly jurisdictions where it’s okay to get the workers you need.

How To Avoid Uber’s Independent Contractor Agreement Mistake

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Uber Technologies Inc.How To Avoid Uber’s Independent Contractor Agreement Mistake has discovered that an independent contractor agreement can be costly if not handled properly.

Why? The company has been getting pounded by government agencies and courts that have taken the position the company’s drivers are actually employees instead of independent contractors.

Although the extra benefits vary by jurisdiction, they can include eligibility for a minimum “living” wage, paid time off (PTO), health insurance, retirement plan contributions, worker’s compensation upon injury within scope of employment (e.g. traffic accident), and unemployment compensation upon departure from the company.

Related Article: Independent Contractor Agreements – Should You Use Them In Your Business?

A common response to these extra costs is for Uber (and similar companies) to simply withdraw from jurisdiction by ceasing to provide transportation services.

Why Is Uber Losing These Cases?

Labor law has become very pro-employee over the past hundred or so years to correct for sweatshop abuses of the 19th and early 20th Centuries.

The legal hammer that’s used to beat down companies like Uber is the degree of control exercised over the workers. If there’s too much control, the government is going to err on the side that the work is being performed by employees rather than self-employed independent contractors.

Related Article: Boost Business With Independent Contractor Agreements

The more socialistic a jurisdiction happens to be, the less control a company will be able to have over the work being done in order to avoid an employer-employee relationship.

This is why it’s essential to have a skilled legal professional prepare your independent contractor agreements as part of your arsenal of business contracts used to protect your company.

What To Include In An Independent Contractor Agreement

Some of the issues your business lawyer should consider for inclusion in your independent contractor agreement with workers are:

  • The contract’s title and language within the agreement should make it clear that it is between a company and an independent contractor, not an employment agreement.
  • The agreement should provide the worker with considerable discretion on how and when the work is performed beyond that an employer would provide an employee for rendering the same services. For example, don’t require contractors to work identical hours as your employees unless it’s absolutely necessary.
  • The contract should make it clear the contractor is ineligible for benefits the company offers its employees.
  • The contractor should be informed that the contractor is responsible for related taxes (e.g. self-employment taxes as an independent contractor) and that the company is withholding taxes as if the contractor were an employee or making contributions to worker and unemployment compensation funds on the worker’s behalf.
  • If the work can be performed somewhere other than the company’s premises, the contract should permit the worker to do so, except with restrictions that prevent such work being performed in jurisdictions likely to find there to be an employment relationship regardless of what’s in the agreement.
  • Unless it’s not feasible, ideally you’ll want the agreement to shift the responsibility to the worker to use his or her own equipment and materials to perform the work.

Related Article: How To Use Independent Contractor Agreements

Type Of Work Matters

It’s important to factor in the scope of the work being performed before deciding whether or not it makes sense to offer employment or an independent contractor relationship to worker. If the work is ongoing and such that is typically performed only by employees, it’s going to be difficult to argue from a legal standpoint that the worker is an independent contractor instead of an employee.

For example, a receptionist who answers telephones a reception area at your company’s headquarters during weekdays from 9 a.m. to 5 p.m. with a mandatory lunch break at noon is arguably an employee even if there’s a written agreement that refers to the receptionist as a contractor. On the other hand, a telephone answering service offsite makes for a stronger case that the worker(s) fielding the calls are contractors.

The B2B Contractor Agreement Solution

Ideally, you’ll want your contract to be between two companies instead of between your business and an individual. Even if there’s only one worker involved, it’s often better to contract with that worker’s single member limited liability company (LLC) or Subchapter S corporation to have the work performed.

Related Article: B2B Contracts – How To Avoid 4 Common Mistakes

This places a much higher hurdle for the worker to overcome for claiming employment status with your company because, if anything, the worker is an employee of the LLC or corporation the worker owns that has entered into the independent contractor agreement to provide the services to your business.

If you need an independent contractor agreement or an employment contract, you’ll want to learn more about our Business Contract Legal Protection Package now.

Don’t Treat Your Employees Like Strippers

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employees independent contractorsAs reported by Jessica Anderson in the Baltimore Sun (Strip club dancers are suing clubs over pay – and winning), strip clubs are getting in trouble by improperly treating strippers as independent contractors instead of as employees.

Although there’s no hard and fast rule as to whether an individual working for your company is an employee or an independent contractor, the U.S. Internal Revenue Service (IRS) does provide some guidance on the issue.

Important Employment Factors

Two key factors that favor employment status are setting the work schedule and controlling how the work must be done by the person. For strip clubs, this meant club management telling the dancers when they had to perform and dictating what they could and couldn’t do when stripping/dancing.

What’s the potential damage by mislabeling employees?

If you treat your employees as independent contractors, you may be liable for back wages, statutory damages, penalties, employment taxes, plus contributions to workers compensation and unemployment compensation funds. These misclassified employees may also be eligible for benefits you’ve provided to your other workers, such as 401k contributions, paid vacation, and health insurance.

How to this problem?

If your workers are really employees, treat them as such from the time you extend an offer to work for you. Pretending they’re independent contractors when they’re not creates a ticking time bomb of legal and tax liabilities you don’t want.

On the other hand, if a worker truly is an independent contractor, it’s often a good idea to make that relationship clear in a professionally prepared written independent contractor agreement signed by the parties. If the contractor decides to assert employment status, you’ve got a contract to point to when trying to convince a judge or government agency that the worker is not an employee.

IRS Form SS-8

If it’s truly unclear whether your workers are employees or independent contractors after consulting with an experienced business lawyer, you may wish to file a Form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” (PDF file) with the IRS for a determination as to the workers’ status.