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.
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.
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!
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