Hiring Others - Employee versus Independent Contractor
Episode 45 on the Business Bites Podcast
The Gist Of This Episode: If you aren’t aware of who you’re working with, they can require YOU to pay and cause big problems! Rachel walks you through the test and how to protect yourself against team member legalities.
Hey guys, Rachel Brenke here, and today I want to dig into talking about … Okay, this is a little boring I think for some, but this is so important for entrepreneurs that are working with others, that are hiring others to help them, whether it’s one off jobs or you’re hiring people full time, you guys need to understand and recognize the status of these people that you’re working with. If they are assisting you in the office or they’re just answering phones, there is a factor test and … But it’s more than that. It’s not enough just saying, “Okay. You’re an employee. Or you’re an independent contractor, so that’s how I’m gonna pay your taxes or my taxes, and how I’m gonna treat you.” You can invoke employer laws, you can invoke intellectual property implications. So I wanna run through this for you guys so that you better understand this if you’re currently having and working with other people or you are planning on dipping your toe into the pool of management.
So, the very first thing we need to determine is is the person that we are hiring or working with, are they an employee or an independent contractor? I mean, it’s typically understood that employees are W-2 employees. Then again, this is United States based, so the test and everything that I’m talking about applies to United States of America businesses and it’s IRS regulations that I’m going to outline for you. So this very first step is determining whether or not they’re an employee or independent contractor. And like I just said, it is not enough to simply go, “Oh, you’re an employee, so I’m gonna give you a W-2 and that’s that.” It’s not enough, and this is where the pitfall and the danger is, it’s not enough to simply say, “This person’s gonna be an independent contractor, so I’m gonna give them a 1099 if I pay over $600 in a calendar year, and that is that.” You can’t just decide that. You can try to contract that, and there is some best legal practices for you to use and whatever documents that you use with these employees or independent contractors, which we will talk about these contracts at the very end and these legal documents that you need to have in play.
But to recognize and understand whether someone is an employee or independent contractor is super important for taxes first, but it also is important to understand so that you know what employer laws are triggered or not. Some States have very specific ways that you have to hire and fire people, whether you can or cannot, and there’s also other legal required things that need to be done, such as postings in the workplace, disclaimers and disclosures that need to be made to employees. It also, this is what is probably one of the most important points and the reason that I’m providing this podcast is, by default if you have someone that creates something for you and they’re actually an independent contractor, that intellectual property ownership remains with that independent contractor, unless you’ve contracted it. Okay? This is from the mirror status of being an independent contractor.
So let’s take for example that you’re a photographer and you have a second shooter that helps you at weddings, and they fall into this category of independent contractor, which we’re gonna go through the test here in a second, but say this second shooter is an independent contractor status and you guys may have a contract, you may not, if you don’t have one then this definitely is what’s gonna occur. If you do have one, it needs to have some specific language in there because by default an independent contractor retains all intellectual property rights in the product, in the intellectual property that they’re creating. So whether they’re a second shooter that’s photographing for you, if they’re a VA that is making social media posts or blog posts, guest bloggers, anything like that, the intellectual property ownership, the copyrights in that property remains with the independent contractor. Okay?
This is really important, it implicates a lot. If you’re hiring someone to create something for you that you’re gonna sell, such as a photographer who’s selling these images to a client, or if you’re an online entrepreneur who’s selling courses or guides to people, if these independent contractors still retain this intellectual property ownership and this material, they can come after you for disgorgement of profits, they can come after you to stop use of the intellectual property and the sales at any time, unless there is some writing that either has transferred the copyright over to you or there’s some sort of license and agreement in play. Which over on RachelBrenke.com, I’ve got you covered on all these different directions. We have a collaboration of work agreement, that’s two people working together. There’s also employer bundles, and there’s independent contractor bundles and my big focus on these is to make sure that you guys are protecting yourself for the intellectual property, other elements too like we just talked about, but definitely to ensure that the lines about the intellectual property are figured out.
The best practice here is to always have a contract, whether they’re employee or independent contractor, is to have a contract there. And like we just talked about, if they’re an employee, it’s owned by you, the company. Whereas if they’re an independent contractor, by default it’s owned by the independent contractor. But either way I still recommend you guys having this package that you present to your employee or independent contractor that has the following. You’re gonna have a contract that’s gonna regulate the relationship, but also to have an intellectual property acknowledgement form. I even recommend this from when you’re hiring a W-2 employee, just in case, for whatever reason, the status may change and they become found to be an independent contractor, that IPA already covers, the Intellectual Property Acknowledgement, already covers the transfer of the ownership of the intellectual property over to you.
So now before I jump into the test, because I didn’t want to give you guys the test first and you start jumping in and evaluating, I want you to recognize that these statuses can change. Most often, the most common one is, is that you start working with someone as an independent contractor and over time you start developing a rapport and a trust in them, it can slide into employee. Okay? And that is where the lines become blurred. It also can be the other direction from employee out to independent contractor as well, that’s less common. So, this is where I strongly recommend that you guys have these legal documents in place. The main contract, intellectual property acknowledgement, a property inventory form if you’re providing any property for them to use, laptops, any computers, so forth. Non-compete agreements for with an employer employee relationship, non-disclosure agreement, whether you’re employee or independent contractor we don’t want them disclosing anything, and a non-solicitation agreement so that these people working for you will not solicit your clients of your customers. Again, you guys can check that out over at RachelBrenke.com, there’s show notes for this episode are going to be RachelBrenke.com/EPI45.
All right, so we’ve gone through, and I think I’ve convinced you guys a little bit that you need to identify the status, there’s implication … Oh yes, one last implication that I need to identify. Not only can you get pain for not following proper laws and procedures if they are employee in hiring and firing. Not only do we have these implications of this intellectual property ownership, but also we have to consider that if you get or are calling someone an independent contractor for example, and they’re found to be an employee and you haven’t been paying employee taxes, you can get strongly, heavily fined and pained from the Government. They want their piece, so we need to make sure that we are following this path. The reason I bring this very important piece up is ’cause I want you to keep this in your mind when I give you the IRS test here in a minute, you need to keep this in your mind because they are cracking down. Guys, they are cracking down hard. There is so much abuse these days of people trying to say, “Hey. I’m gonna hire all these independent contractors to help me.” But then they treat them like employees, and the Government wants their piece. They’re cracking down, they’re looking for this. They will start looking for patterns and it can happen. If it hasn’t happened yet, it may never happen, but it may also.
One of the other big risks of not properly treating someone or giving them the proper status and benefits and so forth that someone may be entitled to, such as under employee status, is that what happens if that individual, if you let them go, all of a sudden becomes disgruntled. Right? And they try to make a claim at you. Or if a competitor recognizes what’s going on and turns you in. So let’s just cross our Ts and dot our Is. The step so far, which I’m about to give you the test, is to identify the status, make sure that you are following all the proper legal requirements for that status by State and Federal Law, make sure you have the proper legal documents in place, either the employer contract template bundle. Like I said, it’s over on Rachel Brenke, or there’s an independent contractor one as well. And make sure you identify that you’re utilizing all of this in play, paying the proper taxes and the proper intellectual property ownership.
All right. So just a little last bit, ’cause we’re almost out of time for this quick education today. But these are the factors that the IRS has outlined. Each State in the United States may have their own specific variations, but most of them are very similar to this. You kinda have to balance the two, you got State Law and Federal Law going on here as well. So the biggest things, they look at the relationship, the financial control, and the behavioral control. Essentially, it is the control factor test.
So let’s start with behavioral control. A worker is an employee when the business has the right to direct and control the work performed by the worker, even if you don’t actually do it, you have the right to do it. This for example, is type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. This is the degree of instruction that’s given, more detailed instructions may indicate the worker is an employee. Less detailed instructions reflects less control, indicating the worker is more likely an independent contractor. They’re also gonna evaluate systems to measure the details of how the work is done, that’s gonna be pointing to an employee. Evaluation systems measuring just the end result is more likely gonna be an independent contractor, could be an employee, this is kind of a little bit of a gray area. And lastly, under behavioral control, is training a worker on how to do the job. Periodic or ongoing training about procedures and measures is strong evidence that this person is an employee. Independent contractors typically use their own methods of how to implement the job. So that was behavioral control.
Let’s look at the financial control. The question is does the business have a right to direct or control the financial and business aspects of this worker’s job? You have to look at the significant investment in the equipment the worker uses in working for someone else, unreimbursed expenses as independent contractors are more likely to incur unreimbursed expenses than employees are. If there is opportunity for profit or loss is often an indicator of an independent contractor. Services that are available to the market. Independent contractors are generally free to seek out other business opportunities, this is typically why a non-compete is not appropriate in an independent contractor relationship. And last thing under financial control, it’s the method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly or other period of time, even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
I do want to note something here for you guys. Listen to the language. It’s talking about there may be rights that exist, but they’re not actually exercised. It’s also saying the words “most often” or “may occur” or “may happen.” That’s because you can’t just go down and check these boxes and if you don’t have ’em all, then all of a sudden it falls into one camp or the other, you have to look at how much control.
Lastly is the relationship. The type of relationship depends on how the worker and the business perceive their interaction with one another. Again, this is not indicative by itself, but you’re gonna hear some repeat a little bit of what I said earlier, but this is straight from the IRS. So the first is, written contracts which describe the relationship the parties intend to create. Although, this is important, very important, a contract stating the worker is an employee or independent contractor is not sufficient to determine the worker’s status. It can be an element to this, but it is … Or I’m sorry, a factor to this, but it’s not a required element.
Benefits. Businesses providing employee type benefits such as insurance, pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors. You may give your independent contractors bonuses and benefits, but just consider, it may be moving them towards the line of employee. Also, the permanency of the relationship is important. An expectation that the relationship will continue indefinitely rather than for a specific job or period, is generally seen as evidence that the intent was to create employer employee relationship. And lastly, services provided which are a key activity of the business. Get a look at that. The extent to which services performed by the worker are seen as key aspect of the regular business of the company, may reflect an employee status versus independent contractor status.
Now, all of this comes directly from the IRS test. Again, like I states, many of the States also have put out checklist factors. Just consider, the more control, the more likely they’re gonna be an employee, and that includes behavioral control, financial control and elements of the relationship.
All right. So I’m gonna go ahead and link in the show notes for you guys. You can check out the IRS.gov links, you can check out also all the legal document bundles that are available. I want you guys to stay on the straight and narrow. I do not want anybody ever coming back on you who was like a second shooter or a VA, and demand that you quit selling photographs to a client or quit using a blog post, and maybe in return, demand extra payment and potential disgorgement of profits. Please don’t get caught out.
The steps again are one, to use the IRS test and/or the State specific test that’s provided to determine whether or not as an employee or independent contractor. Two is to implement the proper requirements that you have if you’re an employer or an independent contractor manager that is outlined by your State. The next is also please, please, please, please, please make sure that you’re using the proper legal documents, whether it’s employee or independent contractor. And again, the quick run down on those is the main contract between the two of you, an intellectual property acknowledgement form, an offer letter, property inventory form, non-compete agreement for employees, non-disclosure agreement and non-solicitation agreement. You guys can check out and I’ll link it in the show notes a more a little bit description on that, you guys can see what’s included. Feel free to take this description to your local attorney. I share this just so you guys see some context on what needs to be done, you don’t necessarily have to get it through me, although it is available at RachelBrenke.com.
And also, lastly, make sure you’re doing routine checks on all the statuses of everyone you have. You don’t want someone inadvertently to be moved from independent contractor to employee and then you get pained later on for not paying proper taxes or following proper laws and/or the intellectual property issues that we mentioned. I encourage you guys, follow these steps, please get in line and make sure that you’re doing everything properly. This is to protect you. It’s really to protect you guys, and ’cause I want you guys to keep succeeding. And that is your business bite for today.
Rachel Brenke is a lawyer, author and business consultant. She is currently helping professionals all over the world initiate, strategize and implement strategic business and marketing plans through various mediums of consulting resources and legal direction.
Hi, I’m Rachel Brenke
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