There’s no denying the impact of independent contractors, or “freelancers”, on the U.S. economy. More than 10 million workers, comprising 7.4 percent of the U.S. workforce, are classified by the Bureau of Labor Statistics as independent contractors. So called “alternative workers” in 2010 are estimated to have accounted for $626 billion in personal income, or about one in every eight dollars earned in the U.S.
There’s also no denying that employers, large and small, can and do find themselves uncomfortably crosswise with various state and federal agencies by misclassifying employees as independent contractors. The penalties for violating the tax codes, the wage and hour laws, and other employment laws are steep and vigorously enforced.
The temptation to use independent contractors is a strong one, given the many advantages to employers with an independent contractor relationship: withholding taxes and payment of any benefits are avoided outright, and workers’ compensation and unemployment premiums are lessened. Moreover, some federal labor laws specifically exclude independent contractors from their scope. For example, independent contractors fall outside the purview of the Fair Labor Standards Act (FLSA), which establishes and enforces minimum wage and overtime pay requirements, and the National Labor Relations Act (NLRA), which guarantees employees the right to organize a union and bargain collectively.
One of the latest areas of litigation between employers and former employees and contractors is over the ownership of intellectual property. There are reasons why an employer should characterize a worker as an employee, and the “work for hire” or “work made for hire” rule is one of them. The ownership of the creative work product of contract workers is disputed and disputable. For example, let’s say your client contracts with a consultant who, in executing the duties of the contract, develops a key computer process unique to the industry of your client. The contractor claims the copyright. In the absence of an agreement providing otherwise, the ownership of this new process will vest in the contractor. The remedy of your client will be the rather dicey proposition of proving an employment relationship between it and the contractor or proving that the process was a “joint work” between it and the contractor. This experience is both expensive and avoidable.
Employers should not shy from independent contractor relationships. Instead, it must be done with careful preparation. A written agreement reciting that the parties deem their work relationship to be between a principal and an “independent contractor” isn’t enough. There are many factors that determine that relationship. Here are some of the more important ones:
1. A statement of the intent of the parties to have an independent contractor relationship.
2. Acknowledgment that the contractor controls the means of performing the task.
3. Provision for a flat fee rather than pay periods.
4. The contractor supplies the tools, equipment and, where applicable, the workplace.
5. The contractor is responsible for the expenses and taxes for himself and his employees.
6. The contractor provides his own insurance.
7. The contractor is exempt from employee benefits.
8. A cutoff date for the services provided.
These factors change and there are others depending on the facts of each relationship, so non-lawyers should not try to draft such an agreement. Our firm will do that for you and a lot more. Our employment lawyers have been recognized for their skill in providing advice and litigation support to employers, large and small, in every area of employment law.