Tips for Safely Hiring Independent Contractors and Ending the Relationship

The independent contractor model of work has become increasingly popular with both businesses and workers, but it’s not without its hazards. Misclassifying workers as independent contractors when the IRS and the U.S. Department of Labor say they should be classified as employees can have serious consequences. Here are 10 tips that can make it more likely that a worker you consider a contractor will be correctly classified:

1. Clearly define the relationship in an independent contractor agreement. (But be aware that just the existence of a contract doesn’t ensure independent contractor status.)
2. Don’t hire a former W-2 employee to perform similar duties as an independent contractor.
3. Don’t use the worker to perform core functions of your business.
4. Pay the worker by the job, not by the time. (In some professions, however, it’s common to pay independent contractors hourly.)
5. Issue the worker IRS W-9, 1099, and 1096 tax forms, as well as the applicable state forms.
6. Limit the duration of the relationship.
7. Make sure you’re not the worker’s sole source of income.
8. Require the worker to provide his or her own tools and workplace.
9. Only use contractors who have their business formalities in place (for example, a business name, business cards, invoices on letterhead).
10. Don’t supervise contractors in the same way that you do employees.

Ending the Contract

In bringing on an independent contractor, you also need to plan how the relationship will end. Your relationship to an independent contractor is a private, negotiable matter reflected by a written contract. However, retaining the authority to dismiss an independent contractor at will can make you vulnerable to misclassification charges.
A wiser approach is to state in writing that the arrangement (for the duration of the contract) may not be terminated unless the worker fails to live up to his or her side of the bargain. Your liability for contractor’s fees in the event that you reject the final result should also be incorporated into the contract. With a properly drafted contract, once the work is completed and all fees and expenses have been taken care of, you have no further obligation to the contractor.