Employer Independent Contractor Guidance

Summary

Independent contractors offer specialized services without employment obligations, but misclassification carries significant risks. This guide helps determine proper classification, understand benefits and risks, and implement compliance best practices to protect your organization when engaging contractors.

Who is this article for?

Employers looking to hire independent contractors (Personal Assistants, Virtual Assistants, Contract Workers, Temporary Hires)

Topics Covered

How to classify if someone is an independent contractor
Benefits of hiring an independent contractor
Risk of hiring an independent contractor
Best Practices for hiring an independent contractor
Legal requirements and compliance for an independent contractor

Before hiring an Independent Contractor, you need to ask yourself:

What are your employment needs?
How many hours do you need (each week / each month)?
How long do you need them for? Temporary or Indefinitely?
Will the demand for work grow as your company grows?
Do you need them on-site, remote, or hybrid?

Is This Person Really an Independent Contractor?

When hiring an independent contractor who is a single individual, the substantial compliance risk for the organization is ensuring that it truly is an independent contractor relationship and not, in reality, an employment relationship. Countries have slightly varying rules about what constitutes an independent contractor vs. an employee, but the overall test is similar.

As a reference, in the US, the IRS' common considerations are (or see our Who is an Independent Contractor? (US) article):

Behavioral: Does the company control or have the right to control what the worker does and how they do their job?
- Are you telling them what and how to do the work?
Financial: Are the business aspects of the worker’s job controlled by the organization?
- Does the organization control how the worker is paid? Does the organization set the payment terms?
- Does the organization control whether expenses are reimbursed?
- Does the organization provide the tools/supplies/resources, etc., to do the work?
Type of Relationship: Does the contractor seem like an employee?
- Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)?
- Will the relationship continue, and is the work performed a vital aspect of the business?
- Does the contractor solely work for your organization?

As another example, Hong Kong considerations are vague and focus on the type of relationship. The regulators will consider:

the intention of the parties of their relationship;
the degree of control the worker has over the job; and
the structure and the arrangements (contracts or agreements).

Benefits of hiring an Independent Contractor:

Provide specialized services on a project or as-needed basis without the cost of a full-time employee
Pay their own Social Security and Medicare taxes
Ineligible for statutory employee benefits
Employer does not withhold or report taxes on an independent contractor's services

The Risk

The significant risk is that the government will reclassify an independent contractor into an employee. As a result, the organization will be retroactively liable for any employment taxes that should have been paid during the time of the contract, could be responsible for any actions the contractor took that the organization would have been responsible for if they were an employee, and likely will receive fines or penalties. Most likely, the organization will owe a significant amount of back taxes and likely will be fined.

And note, if they find one independent contractor that should be an employee, they will look at all of them. They may even include previous independent contractors who worked with the organization and no longer work with it.

Differences in Confidentiality and IP Ownership with Contractors

When working with independent contractors, confidentiality and intellectual property (IP) ownership require specific attention as they differ significantly from employee relationships.

Confidentiality and Intellectual Property Ownership Considerations

No Automatic Protection: Unlike employees, contractors don't automatically have confidentiality obligations. These must be explicitly established through contracts.
Separate Agreements: Consider using a dedicated Non-Disclosure Agreement (NDA) in addition to the contractor agreement for sensitive information.
Duration of Obligations: Specify how long confidentiality obligations extend beyond the contract period (typically 1-3 years for general information, longer for trade secrets).
Third-Party Exposure: Since contractors often work with multiple clients, include provisions restricting information sharing with other clients or subcontractors.
No Work-for-Hire Default: Unlike with employees, IP created by contractors doesn't automatically belong to the hiring organization. Without proper agreements, contractors may retain ownership of work they create. You may want to include explicit language assigning all IP rights to your organization, including copyright, patent rights, and other intellectual property.

Best Practices for Hiring an Independent Contractor:

Issue a W-9 form to the independent contractor
File Form 1099-MISC for payments made
Specify in your contracts that you’re availing of the services of an individual as an independent contractor. Check the contract as well if the independent contractor is providing his/her own.
Establish clear deadlines or milestones for the task or project
You typically can only dictate the results or output of the project, not how, when, where and how long the work should be done.

Appendix

Am I Responsible for the Legal Requirements and Compliance of the Independent Contractor?

One of the great things about independent contractor relationships is that, typically, your organization shouldn’t necessarily be responsible for the contractor's compliance. Any contract should state that the contractor is responsible for following all laws and regulations. You will not be liable for their insurance or taxes; unless your government reclassifies the independent contractor as an employee.

Insurance

Your organization does not hold any liability to ensure the independent contractors have any required insurance or registration. All liability falls on the independent contractor. It is best to include language in an independent contractor agreement that implicitly states the independent contractor holds liability for these areas, but that is already the default law.

Generally, most regions require Worker’s Compensation Insurance (also called Occupational Injury Insurance, Employee Compensation Insurance) for any independent contractor with employees.

Considerations for Jurisdiction

Occasionally, an independent contractor will request the jurisdiction be in their home country. There are two things to consider on jurisdiction: substantive differences in law and practical disadvantages in choosing a foreign/unfamiliar law.

If your answer to any of these questions is not in your favor, push for jurisdiction in your own country unless it is a very special or extreme case:

Do one jurisdiction's laws substantively favor the other party over your organization? (Eg. Contractor vs. client/employer-friendly).
Does the jurisdiction have clear and discernible laws in general?
Do you have the ability to understand and operate under those laws?
- Is your organization able to operate in the language of that jurisdiction easily?
Does your organization have access to legal advice in one jurisdiction but not the other?
- Choice of a forum (where a dispute should be resolved) is not necessarily the same as the choice of law.
  - The critical question is, if this agreement fell apart and you found yourself in formal proceedings, how difficult would it be for you to manage litigation under an unfamiliar legal system?
  - For example, it is less costly to have dispute resolution occur in your location rather than travel.

If you cannot answer these questions, that can be a red flag that you aren’t in a position to assess what the risk may be to your organization. You should push to keep jurisdiction in your region or seek legal advice.