Ruth, a savvy entrepreneur, had finally built her design business to the point where she desperately needed extra help. Hiring a full-time employee seemed daunting, so she used an independent contractor for a major website project. Excited by the flexibility, she found a talented designer, shook hands on a rate, and they got to work.
Three months later, disaster struck. The IRS slapped Ruth with a hefty bill for unpaid employment taxes, claiming the designer was a misclassified employee. Ruth’s budget imploded, and the project was stalled.
Ruth’s story is unfortunately common. Misunderstanding the independent contractor relationship can land businesses in hot water. Let’s unpack the common pitfalls and how a well-drafted contract can be your lifeline.
Pitfall #1: The Control Conundrum
The line between employee and independent contractor can get blurry. The key question the IRS asks is: how much control do you have over the work? Employees are told what to do, how to do it, and when. Independent contractors set their hours, have flexibility in how they get the work done, and generally use their tools.
Contract Solution: Clearly outline the contractor’s independent status and autonomy. Avoid clauses dictating their hours, and methods, or requiring them to use your equipment exclusively.
Recommendation: Essential Clauses for Your LLC Operating Agreement: Building a Solid Foundation
Pitfall #2: The Intellectual Property Problem
Who owns the brilliant stuff your contractor creates? Default copyright law often gives ownership to the creator (the contractor), not the business paying for it. Ouch!
Contract Solution: Include an explicit “work for hire” clause. This transfers ownership of all work products (designs, code, etc.) to your business.
Pitfall #3: Vague Expectations
“Let’s just wing it” is a recipe for trouble. Mismatched expectations can ruin a project or cause lawsuits.
Contract Solution: Nail down these specifics:
- Scope of work: Detail the exact services and deliverables.
- Deadlines: Specify completion dates or milestones.
- Payment: State the rate, payment schedule (hourly, per project, etc.), and if any expenses are reimbursed.
Bonus Clauses for Extra Protection
- Confidentiality: Protect your trade secrets with a binding non-disclosure clause.
- Termination: Define how either party can end the contract, including for-cause termination (breach of contract)
- Dispute Resolution: Outline steps like mediation before going to court.
Recommendation: The Paperwork Tango: A Guide to MSAs, SOWs, Work Orders, and Change Orders
Overall: Contracts are Your Safety Net
A detailed contract won’t magically prevent every hiccup, but it will significantly clarify expectations and give you legal recourse if things go south.
Disclaimer: This article provides general information, not legal advice. Always consult an attorney for guidance tailored to your situation and state laws.
