Ask Addi P: What Do I Need to Know About Independent Contractors?

It's Addi P!

Dear Addi P.,

We keep hearing about the gig economy and want to explore hiring independent contractors for some projects. What are the important issues to consider?

- Contractor in Columbus

Dear Contractor,

This is a pretty big issue to handle in a short post, so I encourage you to talk to your friendly employment lawyer about how to manage the risks of misclassification and other legal issues. You will also want to check with HR to make sure that contractors can integrate well with existing teams and that they are effectively managed as contractors rather than employees. Here is a checklist of key issues and questions when considering hiring independent contractors.

1. Is the Role Appropriate for an Independent Contractor?

Independent contractors have to be "independent." They should have significant control over the means and methods of their work. Some questions to ask are: how much autonomy the person has over the way the work gets done, whose equipment is used to perform the work, does the person has a professional license to perform the work and how the person is paid? The easiest case is a project where the worker provides a finished product she created on her own. It gets more complex when the worker is integrated into a team and is doing the same or similar work as existing employees. You may have to adjust the role and how the work is managed when you hire a contractor.

2. Is the Worker Properly Classified for Tax and Payroll Withholding Issues?

The IRS has useful information to understand the differences between an independent contractor and an employee. However, the IRS determination for tax purposes can be a little different than state laws regarding workers' compensation and other issues. So double check the laws that apply to independent contractors. If you get the classification wrong and hire someone who should have been an employee, both state and federal law provide for significant fines, payment of the payroll withholding that should have been made and sometimes even criminal penalties. In addition, the worker may be able to make a claim for overtime and other wage and hour issues.

3. Is There a Staffing Agency Involved?

Some organizations work with a staffing agency to hire short-term or project workers. The staffing agency handles recruitment, hiring, payroll and any workers' compensation or benefits, while the hiring organization deals with managing the worker and the work itself. Often, organizations like to hire independent contractors through staffing agencies because someone else handles all the administration. However, this can raise issues of dual-employment, which can make both the staffing agency and hiring organization responsible for workplace injuries, discrimination and wage-hour issues. Outsourcing to an agency doesn't necessarily reduce the risks to the organization in hiring independent contractors.

4. Have You Made It Clear Who Owns the Work, How to Protect Trade Secrets and How to Keep Data Secure?

Most contract work is "work for hire," which means that the work product is owned by the organization who hires the worker to do it. State laws can vary and it's good to make this issue clear especially with creatives who may want to use the work later. It's also essential that independent contractors understand what information is confidential and agree to protect the organizations trade secrets and data.

5. Have You Considered Employer Brand and Employee Experience Issues?

When we treat people as contracts, it's sometimes easy to forget that we need to consider their feelings and experience of working with our organizations just as we do employees. Work with HR to come up with an onboarding and performance management plan so the worker feels welcome, understands what is expected, and has a good experience.

Take care,

Addi P.

Addi P is a digital character who represents the human expertise of ADP. The questions and challenges come from professionals who manage people at companies of all sizes. The advice comes from ADP experts who have a deep understanding of the issues and a passion for helping leaders create a better workplace. If you have a challenge you'd like to pose for Addi P, complete this simple form.

The information provided here is for general informational purposes only and not legal, accounting or tax advice. The information and services ADP provides should not be deemed a substitute for the advice of a professional who can better address your specific concern and situation. Any information provided here is by nature subject to revision and may not be the most current information available on the subject matter discussed.