LEGAL ISSUES

How to Manage an Independent Contractor

Due to the independent nature of contract work, it can be a tricky thing to manage, even for experienced CEOs. Here's a look at the best practices for when to retain and how to manage an independent contractor.

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In today's freelance culture, independent contractors are an integral part of small businesses' success. And contractors can fill a diverse slate of positions, from legal consultants to Web designers to copywriters.

Due to the independent nature of contract work – it's often done away from the office, without direct supervision – it can be a tricky thing to manage, even for experienced CEOs.

Dig Deeper: Employee or Contractor? The Wrong Answer Could Cost you


Managing an Independent Contractor: Finding the Right Fit

Before you start your search for the contractor – or even put out feelers – you should be able to clearly define what services you need provided. Draft something of a job description that can serve as your reference point in drawing up a contract. It should include specific tasks to be accomplished – say, for a Web developer, creating a fully functional and easily navigable site, including sales mechanisms and search-engine optimization, as well as educating employees on how to keep up the site if necessary – and under what time frame.

Also in advance, figure out what the service will cost you – and how much flexibility you have to negotiate that figure. In contract work, payment schedules and compensation rates vary tremendously. You can glean a lot of market-rate knowledge by checking contractor-hiring sites such as Elance.com, and even looking on PayScale.com or Salary.com to get a picture of how much a contractor in a given position might expect to make in a year. It's also perfectly couth to ask applicants about their payment expectations.

When crafting a listing for the contract gig, include the tasks at hand as well as a paragraph detailing minimum qualifications, including preferred educational and experiential background. With the listing complete, post to your company jobs site, if you have one. Supplement that with listings specific to the industry you're looking for a worker from and freelance job sites such as Elance.com.

Dig Deeper: Recruiting Skilled Workers to Your Company


Managing an Independent Contractor: Writing the Agreement

Lukas Biewald, founder and CEO of CrowdFlower, a San Francisco-based crowdsourcing start-up, has hired several independent contractors. He likes to set a pay rate and cap the time in increments of a few months, so that the contract must be revisited periodically. Setting up a straightforward and clear agreement at the contract's start is crucial. "I think the most important part of managing an independent contractor is setting really clear expectations from the start," Biewald says.

These expectations should be codified in a written agreement that makes clear the services the contractor is supposed to undertake, and includes a timeline for when they should be completed by. It also lays out a payment system. Logistically, the contractor agreement should be labeled "Independent Contractor Agreement," and clearly state in its opening paragraph that it is not the intent of either party to enter an employee-employer relationship. It should set the duration for the contract, or termination date.

Next, the contract should detail the job that is to be done. Be detailed regarding the tasks at hand, not the manner in which they are to be performed. That said, deadlines should be included, as well as some language about the schedule and method of payment (including how the contractor should bill for the hours or flat rate) should come next. Avoid paying the contractor as part of your regular employee payroll process.

Other items to include:

• State that the contractor is not an "agent of the company."

• Include a clause that as an independent worker the contractor may enter into other agreements not in conflict and a confidentiality agreement.

Legally, the contract is a key part of establishing a non-employee relationship, though it doesn't guarantee that the IRS or other agencies will agree that your contractor should not be reclassified as an employee. If the IRS deems an employee misclassified as a contractor, some states – particularly Colorado and Maryland – can enforce hefty tax penalties on the employer. When in doubt, consult the IRS's guidelines on the difference between an independent contractor and an employee here.

Dig Deeper: Check out a Sample Independent Contractor Agreement


Hiring an Independent Contractor: Maintaining a Contractor's Status

With the IRS estimating that 15 percent of the U.S. workforce is misclassified, you'll want to be firmly within legal grounds – and to document a work arrangement meticulously – when working with an independent contractor, so that there is no doubt about the nature of the relationship.

The basic rule, experts say, is that you determine the what and the contractor determines the how.  You say you want a piece of market research or a graphic design turned into you by a certain date; the contractor decides how to create these deliverables, subject to your approval. It's important to outline specific goals, but the contractor must provide their own tools, equipment, and facilities to complete the work.

In probing the nature of the relationship, the IRS might examine the contractor's level of freedom, including setting his or her own hours, paying his or her own business expenses, and hiring support staff or assistants as necessary.

Remember: It's very important to have your standard contract reviewed by your legal counsel or advisor. 

Dig Deeper: Protecting Independent Contractor Status


Managing an Independent Contractor: Maximizing Productivity

Though you are not allowed to control how an independent contractor does his or her work, but there are ways to guide productivity and help ensure that a contractor will produce top-notch work while also hitting key deadlines. Enumerating the deliverables in the agreement is the first step. Second, be available along the way to answer any follow-up questions your contractor may have. You may also want to schedule regular meetings at which your contractor can update you on their progress.

A lot of follow-up can be done online, but Mark Clark, an associate professor at American University's Kogod School of Business, advises you to not rely too heavily on e-mail. "Just as in working with virtual teams, you don't want to go overboard with trying the technological solutions," he says. "People like people, and like to see the face of them looking them in the eye – that connection is something that people find valuable."

Contract relationships don't need to be impersonal simply because they're temporary. To get the most out of your contractor, give him or her something meaningful to do that's a slice of his or her work. One easy way to do this is to budget an additional 5 percent for writing a follow-up report of for helping to educate full-time employees on how to implement the project on which the contractor is working. Many contractors can add value by consulting for you after they have completed their original assignment.

Another way to engage more fully with a contractor, Clark suggest, is to make tasks scaled or laddered – in other words, give them a minimum amount of work to accomplish, but also set a high bar, and hold out the possibility of additional compensation, to reward the contractor if he or she is able to achieve more than you expect.

"Contractors want all the task identity and job fulfillment that people within the organization do," Clark says. "Give them stretch goals for going above and beyond."

And by creating these goals, you'll be allowing the contractor to feel more satisfied by their job – and come back to you next time you need them.

"While more folks are out shopping themselves out as contractors at this economy, you can be their vendor of choice by just being a bit more human," Clark says.

Dig Deeper: Tips and Advice on Personal Productivity

Last updated: Feb 15, 2010

CHRISTINE LAGORIO-CHAFKIN | Staff Writer | Senior Writer

Christine Lagorio-Chafkin is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is a senior writer at Inc.




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