10 Tips to Lower Your Exposure When Using Independent Contractors to Staff Your Company

One of the biggest challenges you face as you scale your business is getting the right team on board in the best manner.

Every business owner should at least consider using independent contractors in some fashion in her company.

Here are 10 concrete suggestions to help you avoid the most common pitfalls of using independent contractors so that you can protect your company.

1.   Pay for results versus an hourly wage.  

Not only does this help you take a fixed expense and make it variable, but if your independent contractors work remotely, it builds in a simple control to make sure they are accountable.  You can pay them a set amount to complete a specific project; or pay them per sale, per client issue closed, or per event they manage.

If you can’t pay for results, still consider paying a flat fee versus hourly.  This eliminates the “overtime” issue and allows you to know exactly what your team costs will be month by month.  Also, this eliminates the need for your independent contractors (IC’s) to track their hours for you to pay them.  How do you know they are working?  Because they are responsible for getting certain results and you hold them accountable for these results.  If they aren’t getting great results, then you have to decide whether or not you have the right person on your team.

2.   Pay them enough so that they can buy their own benefits.

IC’s don’t get benefits, so you’ll have to factor this into the amount your willing to pay your team each month.  To get the right people you’ll need to pay them enough so that they can buy their own benefits.

3.   Encourage your IC’s to incorporate. 

Not only will this save them several thousand dollars on their taxes if they structure as an S-Corp or LLC taxed as an S-Corp (they can pay themselves a reasonable salary and take the rest of what you pay them as a dividend which is not subject to FICA), but it will also greatly reduce your risk of them ever being reclassified as “employees” by the IRS.

4.   If appropriate, hire your IC’s to work for more than one of your companies. 

One of the IRS criteria for IC versus employee is whether they in fact operate a business.  One way to strengthen your case that they are an IC and not an employee is the fact that they are contracted with more than one company.  In other words, your IC has more than one client.

5.   Have them pay their own office overhead. 

As an IC you are not able to pay for their phone, internet, and other ordinary business overhead costs (this also means you should not give them equipment to use.)  However, like any smart business, your IC’s should charge you enough to cover their costs and then some.  In the event that they need “tools” to start up working for you (e.g. a laptop) you might consider giving them a startup bonus, that way they have the money to buy their own equipment.

Since many of your IC’s will work remotely, the convenience and lifestyle pluses are such that generally your IC’s will have no problem covering their own basic overhead of phone, internet, and computer.  In fact, with no commute, no dry cleaning, and no office B.S. they will be thrilled with the trade off.

6.   Establish a clear written contract with all of your IC’s. 

Your contract needs to lay out exactly what they are responsible to accomplish, the standards to which that work will be done, and the exact nature of the relationship (i.e. that they are ICs and not employees).

7.   You must control all phone numbers, fax numbers, and email addresses they use while doing business on your company’s behalf so that if they ever leave your company you can simply point the stable number or email address to another team member at any time.

In today’s world this is easy for your I.T. department to set up.  The phones and fax numbers can be done through a web-based system or service, and the email accounts will be through your company email server.

I also suggest that you make it clear to them that the company will also monitor and back up all company email, and that they should use the company email only for company purposes.

8.   Make sure they have a clear, simple, consistent way to self-score their own performance on a regular basis. 

To keep doing great work they need to be able to track their results, see progress, and correct as they go.  One of the key parts of making a virtual team work is to make sure every team member knows exactly the standards they must live up to and the results they are accountable for daily, weekly, monthly and quarterly.

9.   Find ways to daily and weekly draw your IC team into the mainstream of your business. 

That’s the only way they will really buy into your company’s culture, understand your company’s focus, and have real access to the information they need to do a great job.

Consider holding webcam meetings with your team monthly, flying your team together at least twice a year, or even setting up informal “lunches” where your team connects in new ways for a 30-45 minute unstructured call to get to know each other.

10. You must find ways for them to find meaning in their work with you. 

You won’t get and keep great talent in today’s competitive world unless you help your team feel a part of something greater than themselves and to clearly see how they personally make a difference in your business.