December 22, 2020
9 Costly Mistakes Employers Make When Hiring Independent Contractors

Does your business have a specific project or type of work that an expert would most effectively complete? Hiring independent contractors for finite assignments or work that does not call for an employee can provide many benefits to a company—when they are classified and appropriately managed.

Before hiring a contractor, employers must know how to classify a 1099 contractor vs. a W-2 employee. There is a critical difference that has legal implications. If you misclassify a worker, your organization could be at risk of significant financial penalties if you are ever audited by the Department of Labor (DOL). 

Need a quick refresher on the difference between employees and independent contractors?

An employee is hired under an employment agreement. As the employer, you are responsible for withholding their taxes and may need to provide things like benefits workers’ compensation. You also have to supply them with office equipment and resources necessary to perform their job.

An independent contractor is someone you hire to work on specific projects or tasks based on an independent contractor agreement. Your company is not responsible for withholding their taxes or providing benefits, as they have to take care of those themselves. Freelancers decide when, where, and how they get the work done.

That’s not all there is to hiring an independent contractor. Every employer needs to know:

  • When you should hire an independent contractor
  • When you should NOT hire an independent contractor
  • 9 costly mistakes to avoid when hiring and managing contractors

Read on for our tips on successfully managing the employer-independent contractor relationship.

When should you hire an independent contractor?

There are scenarios where hiring an independent contractor is the most beneficial and cost-effective option for your company. Freelancers are experts in their field and bring an outside perspective, meaning they can help you identify areas of opportunity and growth.

1099 contractors are ideal for:

  • Short-term projects or those that will last a specific amount of time (e.g., merger and acquisition consulting).
  • A particularly complex project requiring certain expertise (e.g., a brand strategy consultant for a total re-brand).
  • Fulfilling a need in certain circumstances, such as when an employee goes on an extended leave of absence.

When should you NOT hire an independent contractor?

While hiring a contractor can be an excellent solution for certain kinds of work and projects, it is not always the answer. Think twice before hiring a 1099 worker:

  • If you have an employee already doing the job that you’re considering hiring a contractor for (which is a bad look in the eyes of the IRS).
  • As a way to avoid paying taxes, equal employment opportunity, and other legal requirements applicable to employees (this is a huge no-no!).
  • For a role that requires particulars like when, where, and how to work (remember, a contractor sets these parameters).

Hiring a freelancer in any of the above situations can get your business into serious trouble with the IRS and DOL. Avoid the risk by going through a process and carefully assessing when and why a contractor is a better choice than an employee.

9 Mistakes to Avoid When Hiring & Managing 1099 Contractors

Hiring an independent contractor without consulting your human resources department

Not involving your human resources (HR) department could lead to errors in how you classify a contractor. The IRS has developed a 20-factor test to determine the extent of control you have over the individual. Your HR team will help you adhere to this, confirm that the arrangement is legal, and ensure that your company remains compliant. Or they will let you know when an employee should fill a particular staffing need.

Not putting an independent contractor agreement in place

Whatever you do, do not engage a contractor in work without having an agreement in place. This is vital to protecting both your company and the worker: It will ensure you receive the deliverables agreed upon and that the contractor receives compensation.

A solid independent contractor agreement should define the nature and duration of the project and/or work and outline expectations of the work and the outcome upon completion.

Not having an independent contractor policy in place

Develop a formal policy regarding the use of independent contractors. This will create a process that includes HR and ensures everything is up-to-snuff every time a department wants to bring on an independent contractor. 

Your policy should explain that HR is responsible for the overall management of the selection and hiring processes of contract workers. It should also outline the steps that a manager needs to take when hiring a contractor.

Moving forward without setting goals or schedules

Give clear and reasonable direction to your contractor from the start. This will help them help you meet your goals. Establish specific project or assignment goals and timeframes that include regular check-ins.

The flip side of this is not giving too much direction—if you try to mandate when and how they do the work, it could put their independent contractor status at risk. Remember, the freelancer decides when, where, and how they work. Employers must find balance in giving enough direction without controlling how the work is done, so the worker completes assignments on time. Setting goals and schedules will give you metrics to evaluate their performance and results.

Not scheduling regular meetings and check-ins

Schedule either a face-to-face, phone, or video conference meeting with the contractor regularly. This frequency will depend on the type of work they’re doing for your company but shoot for a weekly or biweekly touchpoint. Having a regular meeting will ensure they have all they need to complete the work and that the project is on the right track.

Don’t be afraid to check in periodically to get updates on the status of the project. Setting regular meetings and checking in helps reinforce accountability on the contractor’s paid time.

Requiring contractors to provide a weekly report

While meetings and check-ins are recommended, you should not require contractors to provide a weekly report. In fact, the IRS says this is something employers may only ask of employees. Again, you don’t want to risk their independent contractor status!

Treating contractors as employees

Managers should not require contractors to adhere to specific work schedules or employee policies. Do not train the IC on methods of work (they determine how they work)—remember, you hired an expert for a reason!

When managing independent contractors, do not require their participation in:

  • Employment applications (That’s what your independent contractor agreement is for!)
  • An orientation program
  • Mandatory training programs
  • Employee award and recognition programs
  • Company events

Demanding the freelancer’s participation in any of the above programs could jeopardize their 1099 status.

Not communicating clearly with employees

While internal employees, both full-time and part-time, enjoy different benefits than independent contractors, it’s essential to communicate clearly when you do bring a contractor on board. Ensure you inform them when hiring an independent contractor and explain the contractor’s role and goals. 

Let employees know that they continue to be valued members of the team and explain how they will be interacting with the contractor. Talk to them about the benefits the 1099 worker offers the company (e.g., freeing up employees’ time to work on other important projects and assignments or creating more efficiencies). Practicing transparency when outsourcing work will prevent internal staff from feeling worried or threatened about their permanent jobs.

Be sure to explain the same details to the contractor you hire. Let them know who they will be working with and who they will “report” to (i.e., their main point of contact). Integrate the contractor with your team as needed to complete work.

Requiring independent contractors to work exclusively with their organization

Do NOT require a contractor to work exclusively with your company or ask them to sign a non-compete agreement. This is another mistake that could risk their contractor status, as it looks more like a relationship between an employer and employee.

If the DOL determines the contractor is actually an employee, your business could be liable for:

  • Failing to provide the worker with employee benefits (e.g., workers’ compensation, unemployment insurance benefits, and overtime pay).
  • Failing to withhold social security and taxes from the worker’s pay.

Plus, a non-compete agreement between an employer and an independent contractor is not enforceable in many states, so it wouldn’t even protect your company. Instead, ask them to sign a confidentiality agreement if you have confidential and proprietary information, which is more likely to be enforced against a contractor than a non-competition covenant.

You’ve probably noticed two main messages here: Maintain clear communication with your independent contractors and don’t do anything to put their contractor status at risk. If you consult with your HR team and follow the IRS guidelines, you’ll be on your way to a successful partnership.

Are you considering hiring an independent contractor but unsure if it’s the right choice for the job? BlueLion will help you determine the best solution and ensure you remain compliant. Contact us at 603-818-4131 or today to learn more about our HR services!

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.