360 - What You Need to Know When Hiring Contractors
On today's episode of the podcast I'm sharing what you need to know when it comes to hiring contractors.
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1. Contractor vs. Employee
You've heard me talk about legal layers of protection, and the base level is compliance aka not breaking the law like paying your taxes and not misclassifying your workers.
The state cares about worker classification because they get payroll taxes. The state is also responsible for enforcing minimum wage requirements, worker's compensation, overtime, etc. The state is invested in protecting the people that work in the state.
The IRS cares because you should be paying payroll taxes for employees. If you're misclassifying, they aren't getting their taxes and it's easier for them to get taxes from employees than tracking down contractors.
The worker cares because if you're a contractor, your place of work and time/ hours of work can't be dictated if it's not within reason. This is also a problem when workers who don't have businesses and don't want to have businesses don't know about quarterly tax withholding and get stuck with tax penalties at the end of the year.
2. Determining employee vs. contractor
All states use different tests, but generally the tests fall into one of two categories: the totality of the circumstances test and the ABC test. With the totality test the burden of proof is usually on the worker, and with the ABC test it's on the business to prove the worker could have been a contractor. If you feel like you are in a more relaxed state when it comes to this, know that there are also federal laws around employees vs. contractors to look into.
Inside the newsletter you'll find our Contractor On-boarding Toolkit that includes our State-by-State Classification Guide and our California Contractor Compliance Framework Guide. Sign up for the newsletter at notavglaw.com/newsletter
3. What type of contractor are they?
If they can be a contractor, before we onboard we need to know what kind of contractor they can be. Generally speaking, we can divide contractors into two main buckets: people who are working in our business (this is not typically common as they would often be employees but there are state-by-state exceptions) and people who are project-based contractors. It can come down to who is leading the conversation. For example, if I'm onboarding a contractor and they don't have a business or a contract, I'm sending the contract and leading the conversation. If they have a business, for example a brand photographer, they have their own contract and invoice process.
If you're onboarding, you'll need a process (again, be very careful about those classification tests and how control and direction plays a part in that). You should always have a contract (we've got them in the Contract Club notavglaw.com/club) and there should be a contract per worker per event/project. For example, if they're a second shooter you'd need a contract per event with them. You'll also want a copy of their business license because some states have business to business carve outs and this will help prove if they're a business. We also recommend getting a W-9 before you ever pay them.
4. What goes into the contract?
There are some basics, like a work made for hire agreement which ensures that you get copyright ownership for your business. There's also a provision that the worker understands they're not an employee, though this doesn't absolve you from any audit liability. Outline payment terms.
5. Training
This is difficult to talk about in regards to contractors because one of the factors is we are not training people or dictating what they do because they should be equipped with the skills to do what you're hiring them to do, otherwise they should be an employee. I would consider this more of an orientation to a training so you're orienting them to your business and language. You're not training them how to do their job.