Independent Contractor: Is there any guidance for employers when managing the relationship with an independent contractor?


February 21, 2018

Employers  want to develop a good working relationship with independent contractors (ICs), while not jeopardizing their IC status. The Internal Revenue Service (IRS) provides guidance on observing the IC boundaries, and SHRM provides guidelines for the practical application of the IRS guidance.

The IRS examines an employer's degree of control over the IC through behavioral, financial and relationship criteria. Being aware of these criteria will help employers appropriately manage the IC relationship.

Behavioral control. An IC determines when, where and how to work. The IC not only determines what apparatus is needed for an assignment, but also provides his or her own tools, including computer, workspace and administrative support. Additional staff needed to work on an assignment is hired and paid by the contractor.

The IC's manager should avoid providing work schedules to the IC and requiring the IC to adhere to company employee policies. Also, managers should refrain from training the IC on methods of work; this includes required participation in an organization's orientation program, mandatory training programs, or employee award and recognition programs.

Financial control. ICs experience different financial rewards and constraints than employees. The opportunity to make a profit or loss is an important factor in demonstrating financial control for an IC. An IC is considered a business, and businesses pay their own expenses.

The IC's manager can maintain this relationship by observing the formalities of the written agreement or contract when considering expense reimbursement to an IC and when paying him or her. Also, employers may not require the IC to work solely for their organizations; as a business, the IC should be able to work for other organizations.

Type of relationship. An IC is responsible for his or her own work benefits (such as insurance and time off), professional licenses and insurance.

The IC's manager must not blur the line between IC and employee status by treating the IC as an employee. For example, an IC should not be asked to complete an employment application; instead, a written agreement should be in place that specifies the nature and duration of the project and that outlines both the expectations of the project and the outcome on completing the assignment. Similarly, employers do not provide paid vacation, holiday pay, sick time or any other employee-related benefit to an IC.

Additional ideas on properly observing the IC relationship can be found at the IRS Tax Topic: Independent Contractor or Employee. Also, See SHRM's Audit Checklist for Maintaining IC Status.


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