Last week we started the exploration into the differences between payroll employees and independent contractors, and how control factors into the final determination. Our focus this week is to delve into some additional questions you should be asking yourself specifically when hiring an independent contractor, and what considerations that would support this type of classification. While this list provides a starting point, it is not inclusive, and consulting with an HR representative or the IRS’s guidelines is never a bad idea if you are still unsure of how to classify an employee. That said, we encourage you to use these questions as a jumping off point during your hiring, interview, and negotiation processes. Let’s dig in!
Are They Performing A Marketable Service?
If the worker provides a service that they market and that they perform for other businesses as well as yours, they are an independent contractor. Independent contractors are generally chosen for their particular skills, through a bidding system, or because they were recommended. They may get customers through advertising or they may respond to an ad you placed, but they are not generally hired through a traditional application process.
Will Training Need to be Provided?
An independent contractor performs a service for a business, but they will not require training, because they are free to perform the service as they see fit – as long as there is no contractual agreement stating otherwise. Independent contractors agree to a result rather than the means of getting there. They are not subject to company regulations and restrictions as long as they are within the law. Typically highly-skilled, they are hired predominantly for their expertise.
Who Says How the Job Gets Done?
An independent contractor agrees to an outcome, but how they get to that outcome is for them to decide. When they take on a job, the instructions are to accomplish something, such as landscaping or snow removal. The independent contractor is then free to get the job done through whatever means they see fit. This means they can remove the snow with a rake or use goats to mow the lawn if they are so inclined, unless specific restrictions are agreed to upfront.
Who Handles the Financials?
Independent contractors are not usually placed on your company’s payroll, and they may or may not receive payments on a regular schedule. The average independent contractor will determine their choice of payment options usually within the contract of services. Options can include payment upfront, upon completion of the job they were hired for, or at regular intervals.
Are There Any Benefits?
Benefits you may offer your employees in addition to regular compensation, such as vacation time, 401K, and health insurance, generally do not also extend to your independent contractors. As they are not a standard employee of your company, offering them these sorts of benefit packages is more a kindness than an expectation, as the responsibility, like their income taxes, typically falls instead to the contractors themselves.
Key Action Items
As a Lifestyle Entrepreneur your objective is to build a series of processes that function, without your direct interaction, daily with well-documented instructions that can be either automated, outsourced, or hired. We all have high hopes for technology but there are always limitations with that route, and hiring employees is expensive. The ideal sweet spot is to look at an outsourced service model by hiring independent contractors. The independent contractor model can allow you to scale an idea with limited commitment before you hire an employee, or outsource a function of your business you may never plan on bringing in-house (ex. technology, accounting, marketing, etc.). As with many things in business, this only works well when you follow the rules. The cost of an incorrect classification can cost you BIG bucks. As you look to onboard new independent contractors ask yourself these five questions and document your understanding. Clarify your understanding in your contract with the independent contractor, and add this information to their file. Should you find in your hiring process that they fail to meet these qualifiers… their proper classification may in fact be that of an employee. Come back next week where we will explore the nuances and details of the payroll employee classification.