By now, it's common knowledge that companies worldwide hire more and more independent contractors. Contractors perform tasks and provide services not central to the company's business but still necessary for day-to-day functioning. The fact that independent contractor relationships can be useful and productive doesn't mean they come without their own hurdles.
Disclaimer: This article is informative only and doesn't constitute legal advice. For specific and individual cases, it is always best to seek legal help.
Why companies love hiring contractors
The reason companies love hiring independent contractors is because they don't have to enter an employment relationship for these supplemental services and can engage contractors as and when they need them. Here's a short overview of what differs contractors from full-time employees:
- Independent contractors work for themselves - they are self-employed or small business owners;
- They work for clients on a project basis;
- Contractors work on their own tools and equipment, in their own time;
- The client can only control the end result of their work, not their method, process, and time;
- Contractors pay their own taxes and benefits (such as federal tax, income tax, medicare, social security, and self-employment tax)
- Ending the working relationship is more straightforward than with employees - there are no severance packages or unemployment claims;
Now, keep in mind that on the last point, we said easier, not super easy. Read on to find out how to end a contractor relationship efficiently and without legal consequences.
How to fire an independent contractor
First things first: you can't fire an independent contractor since they are not your employee. What you can do is terminate the independent contractor relationship, especially if the contractor is in a breach of contract. What does this mean? Well, if the contractor doesn't respect deadlines they signed on, if they deliver a faulty product, or provide services you render to be of poor quality, you have the grounds for termination of independent contractor agreement.
When you have a written agreement
If you have an independent contractor agreement, it will be a bit easier to end the relationship. This written agreement should outline the scope of work, required quality of work, termination provisions, and notice provisions.
Termination provisions are guidelines and conditions under which the contractor or the hiring company can terminate the working relationship. For example, termination provisions can state that missing deadlines or delivering subpar products constitute grounds for termination. Notice provisions give out the number of days of notice each side is obliged to provide when terminating a contract; it can be 14 days, a month, or even more. If this is the case in your contractor agreement, make sure to give the contractual notice of termination to the independent contractor in writing. Adhere to these provisions strictly because if you don't, you open your company to the possibility of a breach-of-contract lawsuit.
If you are considering hiring a contractor without a written contract, take a look at our guide for creating the contractor agreement. It isn't too hard to draft one, and it can save you from the headache of unregulated relationships. Great independent contractor agreements cover the entire work scope, the possibility of hiring subcontractors, ownership of the end product, etc.
When you don't have a written agreement
If you started the working relationship with a contractor without setting the terms in writing, it would be best to have a talk about termination of service. Most independent contractors are experts who have their own business that depends on their reputation. If you don't have a signed contract that covers this topic, make sure to have a conversation, or even better, implement good faith measures in writing - via email would do just fine.
Good faith measures allow the contractor to try and make things right with their work quality and deliverance time, but it is essential for you as a client that these measures are sent in writing. This communication can contain the deadline for improvement and a notice that if the contractor doesn't comply, the relationship will be terminated within the deadline.
Paying the contractor for provided services
Even when you are terminating a working relationship, always stay professional and fair. While it is your legal right to terminate a contractor relationship that doesn't work for your company anymore, you have to pay for all the services and products that were delivered to you. Settling the bills you have with a contractor is crucial when terminating the relationship, regardless of whether you are happy with the quality of work. To put it shortly - if you received it, you need to pay for it. If you have a dispute about payment with a contractor, it is best to seek legal advice before proceeding with any course of action. An experienced lawyer can help you determine the details of termination and necessary payments.
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Wrongful termination of independent contractors
In general, companies cannot be sued for wrongful termination by independent contractors because they are not employees. However, there are exceptions in which a company can be liable, so we're going to break them down.
1. The company breached the independent contractor agreement
If any of the contract provisions are breached by the hiring company, and a contract is terminated, the contractor can sue for wrongful termination. This is why it is advised to pay all the provided services and adhere to termination provisions strictly. Failing to do any of these can be grounds for a lawsuit in which the contractor may seek damages.
2. The company misclassified an employee as a contractor
Misclassification of employees is disguising an employment relationship as a contractor relationship in order to avoid paying benefits and taxes. The IRS and the Department of Labor take this quite seriously and usually assign reimbursements to the misclassified employee. We've summed up the most common risk factor
Risks of misclassification with independent contractors
In the US, the Internal Revenue Service (IRS) pays close attention to independent contractor relationships because of their potential for misuse. Some companies hire independent contractors and then treat them as employees, avoiding to pay for their taxes and benefits. Independent contractors are not covered for expenses such as worker's compensation, nor do they have the right to minimum wage and overtime since they don't have fixed work hours. These "savings" prompt employers to take the route of misclassifying employees, which can cost them a lot more in the end.
Read more about what misclassification means and how to avoid it.
Keep in mind that a written agreement with your contractor doesn't shield you from misclassification proceedings. To make sure your contractor is not a disguised employee, make sure to check out the IRS 20 Factor Test, which is used to determine the contractor status. This test considers several factors, from behavioral control to financial dependency, to clarify whether an employment contract should have been signed.
Employment laws and labor laws can be very strict when it comes to employee misclassification. Companies determined guilty of this are liable for massive fines and penalties as well as damages to the employee. The best way to avoid the risks of misclassifying workers is to have a reliable contractor agreement, keep all records, and not use the language usually used with employees. Always strive to speak with your contractors using appropriate terms that show no signs of employment status.
Streamline working with independent contractors worldwide with Deel
If you are hiring independent contractors for your business, Deel can help you streamline the onboarding process by offering you localized contracts, tax form collection, and the best payment experience for both you and the contractors. Schedule a product tour with a specialist to learn more.