Before the recession (we when utter that phrase, I suspect we look like old men in overalls, smoking a corncob pipe and rocking on our porches but…) there were many agency owners who swore that they would never work with outside contractors.  They believed that the quality and integrity of their work relied on having all of the work done by employees that toiled under their roof.

Today — I know very few agencies who still cling to that belief.  Most agencies today have a stable of contractors that help them augment their offerings and skill sets. (Not to mention remote employees, etc.)

The truth is, and our research shows this, that when an agency of 10 or 20 or 50 employees calls themselves a “full-service, integrated agency” their prospects do not believe them.  The prospects know how complicated and specialized marketing has become and they know that it’s pretty challenging to have every discipline under our roof and to deliver against all of those needs at the highest levels.

The great news is — there are plenty of freelancers, strategic partners, and solopreneurs that we can hire to help us serve clients better.  The rub is when we walk the thin line of are they really an employee or are they a contractor.  Should they legally be getting a W2 or a 1099 (in the US) from you at the end of the year?

Independent contractors are generally outside the coverage of various laws that apply to the employer-employee relationship. Which means that it’s easy to get into trouble if you do this wrong.

This is especially important when it comes to issues like pensions and retirement accounts, workers compensation, and wage and hour law. Employers don’t withhold federal, state and local taxes from wages paid to independent contractors, they are not included in an employer’s benefits programs, are exempt from wage and hour, employment discrimination laws and unemployment insurance.

All of which means that the penalties for misclassifying a worker can be huge. Penalties can include back taxes or premiums, civil fines, interest, and other retroactive damages.

Clearly, wherever you live in the world — it matters.  Here in the states, your state’s Department of  Labor and the IRS wants to make sure they get their slice of the tax piece and they want to make sure you aren’t bending the rules to avoid offering benefits etc. to someone who should technically be your employee.

The IRS developed the 20-Factor Test to help employers evaluate whether a worker is an employee or an independent contractor. No one factor on the test is weighted more heavily than any of the others.  There’s also no clearcut — if you answer yes to more than X of the criteria — it’s an employee.

It’s a lot of grey area with some huge penalties, so it behooves you to be thoughtful and informed about how you form a relationship (contractor or employee) with any individual you’re working with on a regular basis.  Some of the criteria include:

  • Is the worker required to comply with employer’s instructions about when, where, and how to work?
  • Does the worker have a continuing relationship with the employer?
  • How does the worker receive payments?Are there payments of regular amounts at set intervals?
  • Are the worker’s services integrated with activities of the company? Does the success of the employer’s business significantly depend upon the performance of services that the worker provides?

You should download the IRS document that includes all 20 of the factors and do a quick check.