PROTECTING YOURSELF

OK, so you know difference between an independent contractor and an employee, you know advantages and disadvantages of hiring independent contractors and you know dangers of misclassification. How do you protect yourself?

=> Independent Contractor Agreement

First and foremost, arm yourself with IRS' control test factors and tests used by various government agencies in your state. Once you have that information, you can structure your arrangements with your independent contractors accordingly. These arrangements should be reduced to writing, in form of an independent contractor agreement.

An independent contractor agreement should contain a description of services independent contractor is to perform, by when they are to be performed and amount independent contractor is to receive in return for satisfactory service.

This agreement can be very helpful evidence in proving that worker's status was independent contractor rather than employee. Although such an agreement is insufficient by itself (if you nonetheless treat independent contractor as an employee agreement will be worthless for this purpose), if factors weighed by IRS under control test are evenly balanced, an independent contractor agreement may well tip scales in your favor.

=> Screening

Before hiring an independent contractor, put him or her through a few hoops first. It's a good idea to prepare some form of questionnaire to extract sort of information you would need to be able to prove in support of your argument that worker is, in fact, an independent contractor and not an employee. Examples of such information (courtesy of NOLO website - http://www.nolo.com) include:

1. Whether worker has formed a legal entity for his or her business. 2. Whether worker has filed a fictitious business name (also known as a "DBA" or "doing business as"). 3. The worker's business address and telephone numbers. 4. The number of employees employed by business. 5. Whether worker has any professional or business licenses. 6. References from other business for whom worker has performed services as an independent contractor. 7. How worker markets his or her business. 8. Whether worker maintains an office separate from his or her home. 9. A description of equipment and facilities worker owns and will use in project. 10. Whether worker has business cards and stationery etc.. 11. A listing of types of insurance coverage worker has for his or her business.

Request documents that evidence responses to above questions. For example, get copies of fictitious business name statements, professional and business licenses; references; business cards and stationery and insurance policies.

At end of day, whether you hire an employee or an independent contractor is a decision for you and your business. If you feel you can adequately protect yourself against an allegation of misclassification then, by all means, follow independent contractor route if that makes most sense to you. But if you don't feel confident in managing relationship to protect yourself from such a charge, for your own peace of mind, you may be well advised to hire an employee even if that is more expensive up-front. After all, if you get it wrong, you'll be paying those additional costs anyway in form of back-taxes (and interest and penalties to boot).

"Dear Rosemary:

Just a quick note to say how much I enjoyed meeting you at last week's trade association mixer. I am particularly interested in your ideas for expanding into export market. [See importance of writing notes on back of card.] I have some thoughts of my own that may help you. I look forward to catching up with you again soon.

Best,

Jack Horner"

=> Maintaining Contact

Then, about two weeks later, call Rosemary and suggest a lunch or breakfast meeting to explore ways two of you could refer each other business.

Invite people you have met to attend social functions such as cocktail parties or other networking events.

Make it a point to make contact with every one of your contacts about every two months or so. This could take any number of forms, you need not always invite people to meet. Sometimes sending someone a clipping of an article of mutual interest or a cartoon that you think they will enjoy is all you will do. Other times, you may want to suggest lunch if you haven't seen person for several months.

=> Working Your Network

Over time, by following above steps, you will develop a sizeable network and an organized way maintaining contact on a systematic basis will become essential.

Establish a system whereby you perform a set number of network development tasks a day, preferably at same time of day. For example, you could set aside an hour first thing every morning to do your networking tasks. Let's say you have 200 contacts in your network and you want to make contact with each of these contacts at least once every two months. At this rate you will need to contact five people every day (200 contacts divided by 40 working days). All you have to do is make five phone calls between 9:00 am and 10:00 am and you're done. Or, you could make three phone calls, send one note enclosing a copy of latest article you wrote for an industry publication and meet one person for breakfast or lunch.

Some days you will have both breakfast and lunch plans with someone from your contact list. Don't forget you can also kill two birds with one stone by inviting more than one person to lunch. Bring together people from your network who don't already know each other but who could help each other. Who knows who these people know that you haven't met yet?

You get idea.

REAPING THE HARVEST

As you can hopefully see by now, key is to keep in regular contact with your network on a consistent basis. Over time, these contacts will become a rich source of referral business for you and your business will grow in leaps and bounds as a result.