The importance of distinguishing between employees and contractors (or consultants) in your business cannot be overemphasized. Using a well-drafted independent contractor agreement is not, on its own, determinative of the legal relationship between your company and your contractor. Courts actually consider a long list of factors to determine whether your personnel are contractors or employees. To complicate matters, different laws may apply in different situations so that the same individual may be considered an employee for purposes of one law but an independent contractor for the purposes of another law.

One thing is certain: An independent contractor agreement can significantly help to clear up any confusion between parties around roles, responsibilities, and legal obligations.

What Happens if I misclassify my employees as contractors?

If you misclassify your employees as contractors, you may be liable for payroll taxes, minimum wage or overtime, non-compliance with other wage and hour requirements (like meal and rest breaks), reimbursement of business expenses incurred in the performance of an employee’s jobs, workers compensation insurance, unemployment insurance, disability insurance, social security, and more. This is serious stuff that could lead to massive penalties. Some government offices, such as California’s Division of Labor Standards Enforcement, there is a presumption that your personnel are employees, unless you can prove otherwise.

If you’re not clear on whether your personnel are actually employees or independent contractors, make sure you consult with an experienced business or employment lawyer for guidance.

Here are some important tips for using independent contractor agreements in your startup:

1. Be very specific about the nature of the services being performed and the compensation that is offered in exchange. Specify the work being performed as well as any delivery deadlines or schedules. Describe whether the engagement ends upon a certain milestone or date. In short, don’t want to leave anything open to misinterpretation.
2. Distinguish each party’s independent legal, insurance, and tax obligations. The independent contractor is responsible for running their own separate business, which is subject to its own profits and losses.
3. Do not micromanage your independent contractors in the course of their work with your company. After you describe the goals that need to be achieved, you should provide your independent contractors with discretion for how, where, and when the work will be performed. You should exercise no more control than is reasonably necessary for the independent contractor to perform the work. 
4. Memorialize the fact that the independent contractor relationship is intended to be one that is limited in time and is not an employer-employee relationship.
5. Specify rules around ownership of intellectual property and when a transfer of ownership is triggered (upon payment in full, incrementally, or otherwise), confidentiality obligations of both parties regarding sensitive company information and trade secrets, publicity around the relationship, and governing law and jurisdiction for disputes.

Startup founders should carefully weigh the benefits and disadvantages of Hiring Employees vs. Consultants in their companies and always enter into detailed contracts with all personal prior to the commencement of any work.

Startup Documents offers a fairly comprehensive Independent Contractor Agreement template generator. Remember to always consult with a lawyer if you have any questions!