3. How to Structure an Independent Contractor Relationship
a. How to Properly Document the Relationship
If you want to properly document that a relationship is with an independent contractor and not an employee in reality, you need to make sure that the contract between the party is clear on the facts that:
- you must describe a precise “result” that the contractor is responsible for delivering, and not only for performing day-to-day tasks within his field of expertise.
- normally, the “result” will indicate a kind of temporary period until the result is actually delivered. Estimated delivering dates may be practical. In other cases this will not be practical, cf the “Foster Mother” case as described under section V below.
- the payment is based on delivering of results and not on hours spent working.
- it is the contractor’s responsibility to use his own tools, unless the work performed is dependent on tools and assets from the principal company.
In addition, it is important that you, during the work period, document that the provisions as mentioned above are also respected during the contract period.
Especially from a tax perspective, the independent contractor should be registered with his own company, and preferably as a company and not a sole proprietor.
b. Day-to-Day Management of the Relationship
It is important that the day-to-day management of the relationship with an independent contractor is based on the respect that the contractor is not one of your employees and is not supposed to be instructed as if he was an employee. The more the principal company feels the need to instruct and control the contractor’s day-to-day work, the more it is possible that he will be considered as an employee by a court.
It is also important that the invoice from the independent contractor is based on the delivery of a defined target and not based on the number of hours work has been performed.
The normal situation is that independent contractors are performing work for you for a temporary period of time, even if this time period may not be that specific. In some businesses we find very long relationships, where the independent contractor has performed his work tasks for the same company for 10-15 years. These kinds of more permanent work by independent contractors may more easily be seen as a “hidden” employment relationship.
If the contractor is able to actually perform work for other principals in addition to you, this would indicate that he actually is a contractor and not an employee.