A Binding Contract
Now is the time to spend money and take time to get the paperwork sorted out when hiring a contract worker, to avoid years of legal fees.
“It’s a cliche, but an ounce of prevention is worth a pound of cure,” Randi Cohen says.
Cohen, who has been a lawyer for over 12 years and specializes in employment law, says while the specifications for hiring a contract worker vary in different states, there are proper measures an owner needs to take to legally protect him or herself long term. If the right documents are not signed and the person is paid improperly, for example, then the shop could lose thousands of dollars in legal fees in the eventuality of a lawsuit.
If completed improperly, a contract worker could sue with claims of unpaid overtime, unemployment insurance and more. While it’s enticing for a business owner to lower overhead by hiring a contract worker, it can be a huge business risk if the worker is misclassified and documentation is not on record.
However, there are situations where hiring a contract worker makes sense. In fact, according to an NPR/Marist poll, one in five jobs in America is held by a worker under contract, and within a decade, contractors could make up half of the American workforce. Within your shop, contract hires can be go-to options for maintenance workers, construction and renovation projects, and many other positions.
Cohen, principal for the Law Office of Randi M. Cohen, shares what a small business owner needs in order to properly hire a contract worker.
Defining a Contract Worker
The main differences between a contract worker and an employee arise from the control that the employer can exert over his or her staff. Employees are under certain requirements when they are hired, including dress code, work hours, work assignments, meetings to attend and firing offenses. A contract worker, also known as an independent contractor, on the other hand, is an individual retained by a company for a predetermined time and price, meaning a company is not responsible for providing traditional employer benefits, such as taxes, social security, health benefits, vacation or sick leave, retirement, unemployment benefits or workers’ comp.
Hiring contract employees has numerous benefits, including the ability to hire for short-term projects, lower overhead operating costs, and the opportunity to hire on an as-needed basis, but those employees typically don’t have the same allegiances to a company that a permanent employee does and may even work multiple jobs at once.
Creating a Contract
While Cohen recommends hiring a lawyer to put together a contract, it is not always necessary. In fact, Cohen says shop owners can certainly put together contracts on their own.
In that contract, you should include an in-depth statement about how the shop is not the employer and the contract worker is a not an employee. The worker should have it outlined in the document that he or she can work at a time and place chosen and agreed upon by both parties.
Outline the due date for the project and the amount that you will pay to the hire. Specify how much you will pay the hire and when that will happen.
If there is an agreement for the employer to be able to fire the contract worker with or without notice, then the contract is voided, Cohen says.
While she recommends an owner do his or her due diligence, laws vary by state. Cohen says you should request references from the contract worker, and a portfolio of work, if it is applicable.
“Make sure there are records of the agreement,” Cohen says. “No cash allowed because anyone can say they’ve never been paid before.”
Identifying the Needed Documentation
1. The Contract
The first document that should be finalized, Cohen says, is the contract between the contract worker and the employee.
As outlined previously, the contract should clearly outline the length of the project, the payment, how the hire will be paid and whether or not there is a non-compete agreement for the duration of the contract.
2. The Tax Documents
In case problems evolve down the line, Cohen says the owner needs to have the right tax forms filed and recorded. Traditionally, that means both the 1040 and I-90 forms are a must.
The worker should come equipped with the proper authorization to work in the state, she says. An I-90 form will be needed in this case. Cohen says that the IRS is “cracking down” on employers for this document because the state law entities do not want businesses to take advantage of undocumented immigrants in order to save money.
While the employer does not deduct any taxes for a contract worker and the worker does not pay into any assistance programs like social security or Medicare, the owner could pay more in the future for the programs, plus interest, if taxes and any type of compensation documents are not on record.
3. The State Law
Document requirements vary by state and Cohen encourages every shop owner to look into the employment laws where they operate.
One law that has become more prominent in New York, she says, entails limitations on what an employer can ask in terms of criminal history. These laws are in place so people with criminal convictions cannot be denied work.
4. The Miscellaneous Provisions
The contract is a negotiation, Cohen says. A contract worker might want to be paid $50 for every hour he or she works on a project but the owner might want to pay a flat rate per week or per month. In this scenario, the shop owner and worker need to sit down and negotiate terms.
“An employer shouldn’t require them to punch in or out because that is a hallmark of a full-time employee,” Cohen says.
To terminate the contract, Cohen also recommends including a section in the contract on when the employer can check in with the worker. Some examples are for the employer and worker to check in every two weeks or for the owner to give a five-day notice of an issue.
“You do not want a contractor and the business fighting over a broken contract,” she says.