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What Employers Should Know About Hiring Independent Contractors

December 28, 2010

Using independent contractors to perform work that is not usually performed by an employer’s regular employees is a very popular concept. It allows the employer to save money by paying the independent contractor on a contract or hourly fee basis without having to withhold employee taxes or to pay for employee benefits or workers' compensation coverage.

There is a downside, however, to hiring independent contractors, notably the potential liability for the work of the independent contractor or for mistakenly considering an individual to be an independent contractor when the individual should be classified as an employee. How can you protect yourself against these forms of liability?

Work of the independent contractor
Under normal circumstances, the entity using an independent contractor is not liable for the work of the independent contractor. However, you can still be sued for the negligence of the independent contractor based on several legal theories such as subcontractor or agency principles. To protect against third-party claims, the responsibility of the independent contractor for the work it performs should be clearly defined in an agreement that provides that: (a) the independent contractor agrees to “defend and indemnify” the employer for any liability arising from the work or the work product; (b) the independent contractor maintains sufficient liability insurance coverage to protect the employer; and (c) the independent contractor’s liability policies name the employer as an additional insured. Employers should periodically check on the insurance coverage of the independent contractor to ensure that necessary coverage continues to be in place.

Misclassification of independent contractor status
Determining independent contractor status can be complicated. Although there are hundreds of pages of regulations and a list of factors that have been adopted by the U.S. Supreme Court and the Internal Revenue Service, one of the most determinations is whether the independent contractor has control over the “manner and means of performing the work.” If this question cannot be answered in the affirmative, it is likely that the individual you are using will be considered an employee and you may be held responsible for not withholding employee taxes, not paying overtime and any penalties for failure to do so. In addition, based on the length of time that the independent contractor has worked on the project and other factors, you could also be required to provide employee benefits to those individuals, including pension benefits. Although the IRS is hard-pressed to make many investigations of this nature, it still manages to bring in millions of dollars a year in fines from those employers who are liable for misclassification.

As far as staffing services, it could be a serious mistake to employ an independent contractor simply because the customer wants you to. The entity paying the independent contractor will be exposed to liability regardless of whether the customer made the determination of independent contractor status or where the independent contractor is working. If you desire to accommodate the customer in this situation, you should (a) accurately verify independent contractor status; (b) require that the customer contractually assume responsibility for making that determination; or (c) hire an outside firm to handle the administration of the independent contractor payroll, including actual payment.

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