Call them what you want – freelancers, consultants, or independent contractors.  They’re the people you decide to bring in when you need extra help but don’t want to hire new employees. Using contractors is so attractive because – unlike employees – you don’t have to provide them with benefits. In return, contractors get the freedom to decide when, where, and how to work.

That’s at least how it’s supposed to work. Often the lines between true independent contractor and employee become blurred, allowing government to impose legal fees, back wages, penalties and damages.

Every year, employers find that the “extra help” contractors provide can cost them big. So to help keep your business out of hot water, here are two common scenarios that get employers in trouble and how to avoid them.

The Retire Rehire Trap

An employee works for you for 20 years and decides to retire, taking with them decades of knowledge. They agree to come back on a limited basis, but essentially do the same job they did before, just with reduced hours. Initially, everyone is happy with the arrangement, but then your contractor gets hurt at your work site and realizes that they’re not eligible for workers compensation, facing an injury that could clean out their retirement accounts. Suddenly, they’re no longer happy with the situation.

How to Avoid It: You can keep people around for their institutional knowledge by making them a part-time employee instead of a contractor. You’ll have to accept the payroll taxes and benefit costs, but you will remove your legal liability.

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If you do want to bring them back as a contractor, be aware of the things authorities look for in determining if someone is truly a contractor: the number of clients they have other than you; whether you’re their only source of income; if they actively advertise their services; how essential they are to your business operations; and, the “ongoing” nature of your relationship with them.

The Indispensable Consultant

When you find someone good, you come to rely on them. When it comes to using independent contractors, you need to be careful just how reliant you become. What starts out as an “as-needed basis” can quickly turn into 40 hours a week. This often happens when a contractor is hired to complete a specified project with a set deadline, but the project morphs into a long-term activity. Regardless of whether you and your contractor are both happy with the relationship, one client and one source of income is a big red flag for government inspectors.

How to Avoid It: Although nothing is 100 percent, you can mitigate your risk. Make sure that your contractor has his or her own equipment and is not using resources like your office space or computer. This may seem like a trivial point, but authorities will consider the extent to which the worker in question has invested in their own materials and supplies. Periodically auditing your contractor relationships with the goal of identifying changes is a good way to avoid surprises, albeit a more involved one. Executing a separate contract with your independent contractor for each project is also a good idea because it emphasizes the independent nature of the relationship.

Need a deeper dive to understand what else you can do to protect your independent contractor relationships? Attend our Defending Your Independent Contractor Decisions seminar on February 22 at the Hilton Garden Inn in Hamilton. For more information, or to register, click here. Or see our Fast Facts on the issue, which is available by clicking here.


Editor’s note: The information in this article is provided for informational purposes only, specific to New Jersey-based employers. The article does not constitute legal advice, nor has it been written or reviewed by an attorney.