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3. How to Structure an Independent Contractor Relationship

a. How to Properly Document the Relationship

Given the potentially devastating consequences of misclassification, every independent contractor relationship should be carefully and fully documented. Before entering into the relationship, the hiring company should obtain basic information and supporting documentation from the prospective contractor, including:

• the structure of the independent contractor’s business (e.g., sole proprietorship, limited liability company, corporation, partnership, etc.);
• whether the independent contractor has any employees or work under subcontracts;
• whether the independent contractor has performed similar services for other companies;
• whether and where the independent contractor maintains an office (other than the contractor’s home);
• how and where the contractor markets and advertises services;
• the types of insurance coverage maintained by the independent contractor; and
• the contractor’s tax identification number.

If the information obtained demonstrates to the hiring party’s satisfaction that the prospective worker meets basic prerequisites to qualify as an independent contractor and that the work to be performed suits the criteria for an independent contractor arrangement, the next step normally is to document the relationship in an independent contractor agreement. That agreement should, at a minimum, specify the following:

• the duration of the relationship (which should be tied to the duration of the project for which the worker is retained);
• the nature and scope of services to be provided (which should be different from those performed by rank-and-file employees);
• the manner and conditions for payment of compensation (e.g., a fixed sum upon completion of the project or identified milestones);
• that the service provider is an independent contractor and not an employee;
• that the independent contractor will not be eligible to participate in any employee benefits;
• that the independent contractor, and not the company, will be responsible for payment of all applicable taxes and legally required contributions;
• that the independent contractor will provide his or her own workers’ compensation coverage;
• what other insurance coverage the independent contractor is required to carry for the duration of the relationship;
• that the contractor is free to set his or her own hours of work and to determine in what manner and sequence the work should be completed;
• that the independent contractor will supply and use his or her own equipment;
• that the contractor will be required to pay his or her own business expenses;
• that the independent contractor is free to hire his or her own employees;
• the conditions on which the relationship may be terminated and the consequences of early termination, including any notice requirements and potential penalties; and
• any desired indemnification (e.g., independent contractor’s agreement to indemnify and defend the company in the event of loss, damage or liability caused by the contractor’s own negligence).

Given the great variability in relevant classification testing, particularly in light of the many different approaches under state law, it is strongly recommended that the agree-ment be reviewed by counsel, in light of applicable standards and actual practice. Care-ful structuring of the independent contractor agreement is imperative to ensure that the agreement itself does not contain terms suggesting that the business has a right to control the manner and means by which the worker performs the tasks set forth in the contract.

b. Day-to-Day Management of the Relationship

Even the most well-drafted independent contractor agreement is of little value if it does not accurately reflect reality. Companies should make every effort to grant independent contractors the level of independence required to preserve the integrity of an indepen-dent contractor classification. Whenever possible, the independent contractor should be a separately incorporated business. Ideally, contractors should be able to set their own hours, have freedom in selecting the site at which work is performed and be free to offer their services to other potential clients. Day-to-day supervision and direction of the contractor’s work in particular should be avoided.

Contractor work assignments should not mirror those given to employees. Rather, em-ployers should carefully and clearly define projects designated for independent contrac-tors, and set specific start and end dates. Any internal evaluation of the performance of independent contractors should focus on the quality and acceptability of the final work product rather than the manner in which it was produced. Under no circumstances should an employer use its employee performance review process to evaluate the work done by an independent contractor. It is also advisable to require independent contrac-tors to provide periodic progress reports and to submit regular invoices as defined tar-gets are met. Moreover, independent contractors should never be paid as part of the company’s regular employee payroll.

Where it is not possible in practice to conform the relationship to the legal requirements, employers may wish to consider alternatives such as re-documenting the relationship to align it with the applicable standards, or retaining a third-party staffing or workforce management company. Although not a panacea, the use of third-party staffing organi-zations can provide a meaningful buffer to liability under many circumstances and could greatly simplify day-to-day management of the relationship.

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