IT Hiring Manager’s Guide — Part 2: Independent contractors — What’s the big deal?

Posted by: Matt Rivera

For part two of our series about our latest eBook, “The IT Hiring Manager’s Brief Guide to IT Staffing,” we’ll discuss independent contractors. Take a look back at part one if you missed it, or download the entire IT staffing eBook, which also contains some frequently asked questions from IT hiring managers.

Independent contractors are supposed to be a single person, sole proprietor, or very small company that is contracted to perform or complete a specific task or scope of work. Using independent contractors is a great way to get something done without adding headcount.

A simple example is your plumber. A plumber comes in, fixes your sink or unclogs your drain, and leaves when he is done. He works on his own schedule, decides how the job will be done, and charges pretty much whatever he wants.

The plumber example might already reveal some of the issues with the use of independent contractors today. Rather than being an independent business, the contractor is simply charging an hourly rate or fixed fee and might be performing like a regular, direct employee. That is, he’s supervised by the company and uses company facilities and equipment. This raises many red flags and creates great risk for the company.

The risks mainly involve potential back taxes and penalties from state and federal agencies, namely the Internal Revenue Service. Independent contractors should be paying their own taxes as an organization and should have established a legal entity with the proper registrations, tax status, insurance, and identity.

Many independent contractors have snuck into organizations alongside temporary employees and consultants. These other categories of workers have risks too, but independent contractors generally stand out and, in many cases, cause both increased risks and costs (because they generally charge more than a temporary worker).

Below are a few items to consider as you assess your risk related to independent contractors. If any of these are true, alert your legal department, seek legal counsel, or talk to a qualified compliance specialist.

• The independent contractor is doing the same or very similar work under the same or similar conditions as a regular (W-2) employee.
• Your manager gives the independent contractor daily instructions or closely supervises his or her work.
• You pay the independent contractor on contractual terms that don’t include things such as milestones, acceptance, required insurance, or a warranty on the work, or without any specific contract or detailed statement of work.
• You don’t have an up-to-date listing of your independent contractor population, their contracts, and engagement details or you don’t have a formal process for determining who is an independent contractor and who is not.

Lastly, independent contractors generally charge more for their work (than using a direct employee or temporary employee). If they are truly independent, this is to offset the taxes they are paying, insurance coverage, and the costs of their business (equipment, marketing, utilities, etc.). If they aren’t, not only are they putting you at risk, but they are essentially making a hefty profit by violating employment and tax laws.

Our eBook contains more information on independent contractors. In the third part of this series, we’ll look at how you can ensure you get the right person for the job.