USING INDEPENDENT CONTRACTORS: LEGAL ISSUES TO KEEP IN MIND

You have a project to fill that requires a person with a 'difficult-to-find' skill-set. You finally hit on a person with just the right credentials, but the person only works as an independent contractor. All of your other workers are W-2 employees of your firm. What's your next move?

First, you need to make sure this independent contractor is indeed an independent. In other words, this person must meet the definition set by federal and state agencies. If you don't, you face substantial penalties for reclassification. Unfortunately, there are no simple tests available to help you in this process. In fact, there is no one single definition of the term 'employee' applicable to all federal and state statutes and legal causes of action. While the commonly referred to '20 Factor Test' used by the IRS to help make the distinction between 'employee' and 'independent contractor' does play a role in these relationships, it is not the only test used and it really depends on the circumstances of each individual situation. The '20 Factors' also may not provide a definitive answer as to the status of the person.

Once you have decided that the person sufficiently meets the status as an independent contractor, the second step in the process is the drafting of a written agreement to help substantiate the relationship. The agreement not only helps to establish a worker's independent contractor status, but can also help to avoid later disputes by providing a written description of the services to be performed, when they are to be performed, and how and when the independent contractor will be paid. While an agreement by itself will never make an employee an independent contractor, it will help to show the intent of the parties and may tip the scale to the independent contractor side when the situation is a close call.

The following are some issues that should be addressed in this document. While the issues raised are a starting point, the agreement needs to be tailored to reflect the relationship between your business and the independent contractor, and should address any state laws that may be relevant.

Scope  The agreement should define the breadth of the relationship. The actual assignment is often handled through the attachment of schedules or statements of work detailing the exact specifications.

Term and Termination  This should indicate the length of the agreement and is coupled with the termination provisions as to how, when, and under what circumstances the agreement may be terminated.

Assignability  This relates to whether the agreement can be assigned by either party. It is generally advisable to limit assignability to ensure the identity of the party with whom you are contracting. The company would generally seek to be able to freely assign the agreement. (This is especially useful if the company is sold during the term of the agreement.)

Payments, Expenses, Fees  Aside from outlining the amount of the payments, which is often done in a schedule to the contract, these provisions should address the payment terms. When, if at all, are the payments subject to chargeback?

Confidentiality  A confidentiality agreement should detail the information you and the independent contractor will receive and address protection of your client's confidential information, if applicable. Furthermore, you may want the terms of this agreement to remain confidential. You do not want information as to what you are charging or paying to be shared with other companies or persons.

Independent Contractor  The parties should clearly remain independent contractors to each other. It is important that a provision specifying the relationship be included. The company and the independent contractor should, as much as possible, each remain liable for its own acts and payment responsibilities.

Benefits  The agreement should include a clear statement as to the provision of benefits. This may include a representation that the independent contractor will obtain from his or her employees a statement that those employees are only employees of that independent contractor and will only look to that entity for benefits.

Representation  A representation that all persons assigned to the contractor are employees of the contractor, and that the contractor will pay all payroll taxes and provide statutory benefits related to its employees.

Liability  The independent contractor should assume liability for the acts of his/her/its employees. You should consider obtaining an indemnification and hold harmless agreement. This, if properly drafted, can help protect you from a lawsuit by an injured independent contractor employee.

Insurance  The agreement should include representation and certificate of insurance for workers' compensation. Contracts should also require general liability (including contractual coverage for this agreement) and non-owned auto, and consider errors and omission and fidelity insurance. Ask to be an additional insured on all but the workers' compensation. Make sure, if you are a contractor and are sub-contracting to this independent contractor, that you mirror the coverage required of you by your client.

Ownership of Intellectual Property  Get from the independent contractor, and require the independent contractor to obtain from his or her employees who are assigned to your project, an agreement that all rights to intellectual property pass to your company or assignee.

Attorney Fees  Include an attorney's fee provision that provides that the independent contractor will pay all legal fees you incur regarding any dispute arising out of the agreement. In some states, an attorney's fee provision by statute will be inferred to be mutual (payable to the prevailing party).

State Law  Specify the state law that is to control the agreement. Be sure it has some relationship to the parties. You can also generally specify where any lawsuit/arbitration needs to be held regarding the agreement.

Non-Piracy, Non-Compete  Have a non-piracy provision in the agreement. This should relate to the hiring of each other's employees, as well as contact with your customers.

Non-Exclusivity  Indicate that both the company and the independent contractor can deal with and seek work from other parties. It may be desirable to limit the independent contractor's ability to do work for any of your customers that he/she/it works for or learns about because of work on your project either directly or through other contractors.

While management and workers both may seek to expand the use of independent contractors, federal and state agencies are examining independent contractor relationships more closely to see if such workers are, in fact, employees. It is very important that employers take whatever steps are necessary to ensure that their workers are properly classified. The IRS, in particular, metes out harsh penalties for misclassification.

Diane J. Geller, Esq., is a partner with the Florida law firm of Ruden, McClosky, Smith, Schuster & Russell, P.A. Her practice focuses on representation of staffing companies in issues including contract negotiations, employment matters, and subcontractor issues.

The contents of this article is intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.