Q: I need some help to get my new startup idea off the ground, and I don’t have any employees. Can I hire a few independent contractors?
A: Some of the biggest benefits of using an independent contractor include avoiding employment tax deductions, minimum wage and overtime requirements, and the Minneapolis and St. Paul sick leave laws. But simply calling someone an “independent contractor” is a risky move. If you make the wrong call, you could invite a lawsuit or government investigation. Misclassifying an independent contractor could leave you on the hook for taxes, back pay, penalties and interest.
So, how you can tell if someone is an independent contractor or an employee? Some tell-tale signs that someone is an independent contractor include:
- a contract for a limited time period,
- payment on a fee-per-project basis,
- no restrictions against the individual to working for other clients, and
- freedom of the individual to govern the method and manner of his or her work.
But there is no hard-and-fast rule. Several multi-factor tests may apply. The United States Department of Labor uses an “economic-realities” test, which considers seven factors, including the length of the relationship and the extent to which the services are integral to the startup’s business. The Internal Revenue Service applies the “control” test, which considers the relationship between the parties and who has behavioral and financial control over the individual’s work.
Because it may be difficult to determine whether an individual is an employee or an independent contractor, we encourage startups to talk with an attorney who can provide a professional opinion and, to the extent possible, draft an independent contractor agreement with appropriate safeguards.