Minimizing Liability with Contracts

So, how do you prevent temporary help and independent contractors from being legally treated as employees, so you can avoid some of the legal and financial drawbacks of being an employer?

You can very carefully structure the working relationship, as embodied in the contract you have negotiated, so as to limit your control over the worker. Whenever you enter into a contract with an agency or an independent contractor, you will have to specify who has control over which aspects of the work that needs to be done. The more control that you have over the employee and the more aspects of the employment relationship that you have responsibility for, the more likely you are to be considered the employer of a temporary employee, which can in turn make you subject to certain federal laws.

Drafting a contract with a staffing agency. Keeping in mind that you will always have to accept some liability, be sure to use these pointers in negotiating the contract with a temporary employment or leasing agency. Negotiate the contract as you would any legal contract and be sure to seek legal guidance before you sign to be properly protected. Here are some basic guidelines to follow:

• Make the agreement between your company and the other company, not between you and another person.
• Clearly designate the responsibilities and services of each party — hiring, firing, training, assigning work, making work rules, etc.
• Carefully draft clauses that protect you from liability for employees and their actions and penalties associated with those liabilities.
• Specify job descriptions.
• Indicate situations that will cause you to terminate or prematurely cancel the contract.
• Delineate all confidentiality requirements you have.
• Stipulate which party is responsible for payroll, withholding, and payment of taxes for the individuals.
• Clarify who has primary responsibility for paying and providing workers' compensation insurance and who has the immunity protection.
• Indicate to what extent employee benefits will be provided by the staffing company and the level of contribution to the benefits offered.

Contracting with an independent contractor. In contracting with an independent contractor, you should attempt to structure an agreement around a test created by the IRS to determine if a worker is an employee or an independent contractor. That test is referred to as the multi-factor test. You can help ensure that your contracts pass that test by:

• structuring the agreement between your company and the other company, rather than between your company and an individual, if the independent contractor has incorporated or formed a limited liability company
• specifying the fee and the due date for the work
• calling the work "a project" and saying that it can be done whenever the contractor wants to work
• indicating that the person is free to work on other things (even though your project may require a full-time commitment)
• doing nothing that makes the person appear to be your employee, e.g., do not pay benefits, FICA, or FUTA, keep a personnel file, or prepare I-9 forms
• requiring that the contractor invoice you for all services

The Business Tools area includes a sample independent contractor agreement.