Proper Use of Independent Contractors

First, some needed legal background:

• Legal considerations for use of Independent Contractors (Lawyer)
• Practical Do's and Don'ts when using contractors (more lawyering)
• Proper Classification of Contractors vs Employees, Benefits, Caveats
• Legal and Financial Advantages and Disadvantages of Using Contractors
• On Hiring and Paying Independent Contractors

Second, the Tax (IRS) background:

• IRS Definition of an Independent Contractor 
• IRS Document describing differences between employees and contractors
• IRS Topic 762 - Independent Contractor vs Employee
• Texas Workforce Commission - Independent Contractor Test
• US Small Business Administration - Hiring a Contractor of Employee?

Third, practical preparations:

1. Read the background documents above, thoroughly
2. Consult with company attorney, if possible, draw up sample contract and statement of work
3. Consult with Accounting to ensure contractors are paid correctly (not out of payroll, but out of accounts payable) and promptly
4. Write a document including everything needed about hiring contractors including details such as:

• How contractors are to be treated, as opposed to employees
• Access to systems required by contractors
• Access to people required by contractors
• Background contractors must have (minimum requirements)
• Nice-to-have, but not required, skill sets
• Citizenship, green card, H1B requirements
• Security requirements if needed
• How contractors will be found (search methods)
• How contractors will be selected (grading system)
• Process for establishing trust relationship between contractor and company
• Conditions for termination prior to contract end (lawsuit prevention)
• Process for periodic evaluation of contractor (feedback, warnings if needed)
• Maximum period of (initial) hire
• Detailed description of results required from contractor for first, initial hire
• Rough method of costing results, converting work into hours worked and vice-versa
• Plan to minimize and regularize communication (daily reports, morning feedback)
• Exact, specific rules on ownership of intellectual property - work done for hire is owned by the company, how that work is done (methodology) is typically owned by contractor
• Equipment (laptop, etc) required by company to access needed resources
• What are the ways the relationship between the contractor and the company can go wrong, and how can they be prevented

Once the above have been completed, then the real work begins.

Employees of the company who are to have regular interaction with the contractors must be educated in the subtleties of contracting so that they do not muddy the waters and create words or situations where contractors look like employees.  This has to be done before trying to hire any contractors, and is critical for preserving the "wall" between them.

Note that the IRS has a rather complicated system for determining contractor vs employee.  I can boil that down quickly:

1. The contractor must work offsite most of the time, only come in for absolutely necessary meetings; these need to be few and brief
2. The contractor should have her own corporation, business name, business cards, accountant, insurance, attorney.  While these are all superficial, they definitely have meaning to the IRS.
3. Under no circumstances tell the contractor how to do her job, what she shall do, when she is to be in the office.  That is her job.  The only thing the paying company can do is specify the results, and possibly the deadline for those results.
4. The paying company actually pays for specific results rather than work done by the hour.  This is why value to hourly computations are so important.
5. The contractor should have multiple customers, even if serviced serially.  Working long-term for a single customer takes on color of employer/employee relationship with time.  Multiple customers obviates this almost completely.

I've said this before, let me repeat it: Contractors are in it for the work.  They want work to do, money to earn.  They don't care about company politics and should be completely shielded from it.  They don't care about intangibles, would rather not have to consider personalities or policies, don't sing the company song.

Additionally, if a company sets up a contractor for failure, whether through accident, failure to prepare, poor personal or business ethics, bad data, whatever: breach that contract, and that company will have a potential lawsuit hanging over them for a long time to come.  The statue of limitations for civil actions is long.  A smart contractor who experiences a breach of contract will dust herself off, get another contract, and wait for a good opportunity before taking action.

Care in business dealings is recommended.