In today’s recruitment landscape, it’s not uncommon to hear of business owners hiring independent contractors. Business owners can get the specialized help they need to complete a project without having to expend efforts on training and shell out money for employee benefits and taxes. But before you get started read on for the five things you need to know before hiring an independent contractor.
The very first thing you need to know is the difference between an independent contractor and an employee. While this may sound like quite a basic principle, you’ll be surprised at how gnarly and complicated this definition may be. Depending on where you live and the department of labor laws related to independent contractors, the definition of independent contractors versus employees may vary.
Generally speaking, the main differences between the two can be outlined as follows:
If you’re hiring an independent contractor, make sure your agreement matches the key factors that differentiate an independent contractor from an employee. If even one factor matches those of an employee, you may be liable to misclassification and other risks (see number three).
Before undertaking any action that will impact your business, it’s always good practice to do a quick study on the pros and cons of your decision. In this case, the pros and cons can be summarized below:
Besides the disadvantages mentioned above, one of the most critical cons of hiring an independent contractor is your exposure to misclassification and other risks. Misclassification happens when a governing body deems the nature of an independent contractor’s job as that of an employee. This is why being aware of the definitions and differences between an independent contractor and an employee is extremely important. The consequences of misclassification usually result in heavy fines on the company’s end as well as increased scrutiny under the governing body.
Unfortunately, misclassification in Asia is not uncommon. In 2018, the Philippines’ Department of Labor and Employment cracked down on the Philippine Long Distance Telephone Company, mandating that they regularize over 8,000 contractual workers, and pay a settlement fee of approximately $1.8M USD. In 2019, the Indian multinational company Infosys, was fined $800,000 USD for worker misclassification and tax fraud.
To avoid misclassification, you have to be aware of your local labor laws and pay particular attention to the misclassification clauses. While our general description of an independent contractor and an employee should apply to most countries, it’s always best to err on the side of caution. You can also take this up with a lawyer just to make sure you have all your bases covered.
Even though independent contractors will only be working for you for a short amount of time, it is even more important to ensure that you have the necessary paperwork ready. Depending on where you are based, there are still a number of forms you may need before you start the hiring process. In the U.S. for example, employers will still need to collect tax information from their independent contractors.
Besides this, having an iron-clad contract that specifies the scope of the project, the owners of the finished product (to protect yourself from property rights), billing and invoicing, payment, and the withholding of taxes is an absolute must.
Other additional documents you might want to consider to avoid entanglements in the future are a non-disclosure agreement, a non-compete agreement, and a non-solicitation agreement. However, you must make sure your independent contractors are aware of all of these agreements before they agree to sign the contract, as signing these additional documents may be a deal breaker for them.
If you want to avoid the headache and stress that comes with copious paperwork, you can use companies like Multiplier that allow you to effortlessly generate a contract and set up an easy payroll system for your independent contractor. With Professional Employer Organizations (PEOs) like Multiplier, you can also rest easy knowing that the amount of risks involved in hiring an independent contractor are limited because you’re entrusting the professionals to help you hire and employ your independent contractors legitimately.
An Employer of Record or EOR, is a service that assists companies in outsourcing expertise and engaging with independent contractors through an existing legal entity.
Even though independent contractors may end up working for you for a short period of time, do not skimp on vetting them before you hire them. A bad hire can cost you time and money, with the worst case scenario being that the independent contractor runs away with your money and does not even complete the job.
It’s only normal to undertake some form of background check when it comes to hiring. Whether it’s an independent contractor or a full-time employee, you can apply the same recruitment protocols for both. Take a good look at their resume, ask for a portfolio and some references, especially from their previous employers and colleagues. You can also set up an interview process where you schedule a one on one video call with them to verify if this is someone you want to entrust work to.
At the end of the day, hiring an independent contractor will really boil down to the nature of the job. If it’s a project that can be completed in a certain amount of time without much supervision on your end, that’s a perfectly acceptable job description for an independent contractor. If however, you want more say and control over the job, will require the individual to be present during certain hours, then you may want to consider hiring him or her as an employee instead.