Tips on making your Independent Contractors audit proof

I posted the other day about the government's increased efforts to crack down on misclassified independent contractors. "Misclassified independent contractors" are workers who should really be employees of the business,  In other words, these workers are entitled to workers compensation and disability insurance, unemployment benefits, tax withholding by the employer and so forth.. 

Here are some pointers on making your independent contractors or consultants audit proof:

  • Pay your independent contractors per assignment or per project, not by the hour, and don't pay them a fixed weekly or monthly salary; 
  • Keep them away from your “real” employees and don’t dress and equip them like employees, i.e. don't give them company business cards, don't let them use your company letterhead, don't let them perform the exact same tasks that your employees perform.
  • Keep the independent contractors on a long leash (give them their "independency"). They should be able to control when they can work and how they work; Avoid micro-managing their work.
  • Don’t forbid them from working for other employers on similar projects. But you could require them to at least inform you when they do, to give you the option to limit their engagement at that time.
  • Put

all of the above into an independent contractor agreement, a.k.a. consultant agreement. 

The Law Firm Orrick put a pretty good consultant agreement of this sort on its website in its startup library.  But beware, each agreement needs to be tailored to your particular situation. 

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027.

15 comments

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  14. The advise the attorney gave on how to avoid the scrutiny of the government would have also been useful for a client of ours that ran into an issue with the Korean National Tax Service and the Ministry of Labor a few years back.
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