Business Law - Best Practices when Hiring Freelancers

 Best Practices When Hiring Freelancers
 By: Alan Orlowsky

 Let's Talk about.....Business Law and Hiring Freelancers and how to treat them as independent contractors, so you wont be liable for their payroll and healthcare benefits. These best practices can can apply to new Business Formations, Partnerships or Existing Businesses.




In the 1990's Microsoft Corp. supplemented its workforce by hiring "freelance" computer programers. The freelancers signed agreements when they were hired, stipulating that they would work as independent contractors, receiving cash payments for their services. In the agreement the freelancers also stated that they would be responsible for paying their own social security, unemployment, and workers' compensation taxes.

By Treating those workers as independent contractors, Microsoft believed it could avoid the cost of providing benefits and paying employment taxes. Microsoft made a very costly mistake. The company integrated the freelance programmers into its workforce. They worked on projects with regular employees, under the same supervisors, using the same supplies and equipment, during roughly the same hours, performing similar tasks, and on the company's premises. Microsoft believed that merely executing a formal agreement, in which the freelancers classified themselves as independent contractors would insure the freelancers independent contractor status.

Logo courtesy of http://www.microsoft.com

The IRS on the other hand, believed Microsoft was treating the freelancers as if they were employees. As a result of an IRS action, Microsoft agreed to pay all the freelancers back employment taxed plus penalties. But the company was in for an even bigger shock.

In 2000, the United Court of Appeals, reviewing the case of Vizcaino vs Microsoft, decided that since the freelancers were really employees, Microsoft should have provided them the same benefits that all regular employees enjoyed - including group health insurance and 401 (k) plans. Now Microsoft must pay those freelancers millions of dollars in back benefits.

 Guidelines, not Laws:

The rules for hiring and compensating independant contractors are not precisely defined or uniformly applies. The IRS might view your situation one way, and the National Labor Relations Board or the Wage and Hour Division of the Department of Labor might see it another way. Your State department of revenue might not agree with the Fed.

Although the government does not provide clear, concrete rules for distinguishing freelancers from employment, the guidelines given below can help you when hiring freelancers. Be sure to consult your attorney and your accountant to formulate your hiring policy, and any work contracts, before you engage a freelance newsletter writer, editor or designer.

Control over Work Methods

The most important test of weather a worker qualifies as an independent contractor is how much control he or she has over the methods and means to accomplish the assignment. For Example:

• An Independent Contractor (IC) should be free to decide how, when and where the assignment work is done.
• The IC should use his or her own equipment, transportation and supplies whenever possible.
• The employer should not have to train the IC for the assignment.

Compensation
An IC should be paid by the job, upon submitting an invoice or series of invoices to the employer, and not according to a monthly or yearly salary. At the end of each year the employer should file Form 1099 for each IC who was paid at least $600 during the year.

A Freelancer should run a Real Business
The IC usually has his or her own office that they operate out of, even if it's little more than a desk and a phone in a spare bedroom. If you provide the IC regular desk space on your premises, the IRS might consider that worker your employee. Other considerations include:

• Most Freelance writers, editors and designers make their services available to many publishers in the marketplace. If yours is the only 1099 attached to an IC's income tax return, expect an IRS audit.
• ICs should have the ability to subcontract the work you assign to them, or reassign the work to an assistant who works for the IC.
• Workers are more likely to be considered ICs if they advertise their services, use their own printed business cards and letterhead, carry business insurance and have a separate  business telephone line.

Industry Standards
Some industries - including publishers, professional practitioners, consultants and marketing firms - customarily hire freelance writers and designers more than other industries, and the IRS knows who the are. If your company is any of those fields, you are more likely to convince the IRS that the ICs you hire are really not your employees. If your company reports significantly more IC compensation than is standard in your industry, you'll attract IRS attention.

Contracts
As in the Microsoft case illustrated above, a written contract won't guarantee a worker IC status if all the other factor point to a classification of employee. Getting an IC's signature on a work-for-hire contract will help reinforce your efforts to comply with the rules. At the very least, such a contract should spell our the nature of the assignment, deadlines, compensation and acknowledgement of the worker's IC status. Always check with your attorney for contract laws and business transactions.



If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or visit our website www.orlowskywilson.com.