Hiring freelancers or contract workers provide a simple way to build or extend your staff. Any type of work you need accomplished you can hire a freelancer to do. You can seemingly have a massive staff and free up your own work hours for building your own business.
As with any business undertaking though, risks exist. You can easily mitigate each of these to get more work done.
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What are the risks of hiring contractors?
As popular as the gig economy has become, it still has its drawbacks. Before you jump in and hire anyone as a freelancer, you need to understand the risks before you and create a plan to mitigate them. Six main risks exist.
Misclassifying Workers
You need to read and understand the Internal Revenue Service regulations surrounding independent contractors (IC) and employees. Certain items are no-nos when it comes to freelancers. You cannot tell them when to work, how to work, assign them titles nor provide them business cards. Unlike working with employees, you will not have access to an independent contractor’s computers or mobile devices. They bring their own equipment and you will have no snooping rights. With an employee, you set their hours, pay them a set salary or hourly rate, pay their Medicare, Social Security and unemployment taxes and provide benefits. Since you own the equipment an employee uses, you may install software that tracks its use to protect yourself from employee misuse. The one thing the two types of workers have in common is that you can set work milestones and deadlines by which they must complete the work. You can incur significant legal liability and face IRS seizure of your assets if you violate the law regarding independent contractors and employees.
Inadequate Project Documentation
You need to create a complete project document at the outset that sets forth the requirements. This statement of work should provide as much detail as possible about the commissioned project, milestone dates and descriptions, payment dates and payment amounts. This document also needs a termination clause to protect you if you need to drop the contractor without full payment if they miss deadlines or submit work of low quality. The termination clause protects you from legal liability. Have each IC sign the project document before beginning. Without this document, you go into court unprotected if sued.
Failure to Designate as “Work Is For Hire”
Your project document must designate that the work the IC completes is a “work for hire” otherwise, the IC owns the copyright. According to the US copyright office, the creator of a work owns the copyright. The only exception to that is when the item was created under a “work for hire” agreement. You may name yourself or your business as the author or creator of any work an employee or freelancer creates as long as it was created under a work for hire agreement that specifies the scope of work, the pay and that plainly states that the project they are completing is a work for hire. You only obtain the rights to the specific work for hire described in the project document signed by the IC.
Late Payment or No Payment
Pay your contractors quickly and in the amount agreed upon. Most ICs will take legal action for non-payment. In a step-wise fashion, you will probably receive a demand letter from their attorney, then have it sent to collections if you ignore the attorney. Their final step is to take you to small claims court which would mean paying them, attorney fees and court costs. Rather than damage your business’ credit rating and your reputation, simply pay your ICs when they submit their completed work.
Matters of Disclosure
Protect yourself from an IC who knowingly or unknowingly shares your firm’s information with another business by having each IC sign a non-disclosure agreement (NDA). The NDA provides you legal recourse if you learn that the contractor shared your business’ data concerning its business partners, operations, products and/or services.
Workplace Training Issues
While the freelancers you hire are not employees, you are still responsible for legal issues related to them. Whether a manager, employee or IC experiences or acts to create sexual harassment or discrimination, you remain legally culpable. based on race, color, or national origin, you could face legal problems. Your freelancers also need to receive training as your employees and managers would have so they know how to maintain professional behavior in all interactions.
Additional Tips for Managing Risk when Hiring Contractors
Besides specific mitigation of the above six risks, you need general policies that guide and control your business’ engagement of contract labor. Your business practices can create a positive environment that contributes to your firms’ success and helps to create a healthy work culture.
- Research and create clear policies and procedures regarding independent contractors. Include in these policies risks and mitigation techniques involving remote workers.
- Create a stringent security plan with methods for protecting the company-owned computers and laptops like firewalls, a VPN, full disk encryption, malware protection, content filtering, plus strong authentication and authorization measures as well as applying patches as soon as they become available. You also need a monitoring program for the business network. You will need to devise non-invasive methods of ensuring that your ICs do not bring unwanted viruses or Trojans onto your systems. For example, have ICs upload to a cloud area that automatically scrubs the file. Otherwise, educate all employees and managers on privacy, keeping in mind the difference between an employee’s right to privacy and that of an independent contractor or freelancer. Remember that you have no legal right to observe the freelancer or IC while they work. If they learn that you are observing them via their computer or other means, they can sue you and press criminal legal charges.
- Conduct the interviewing and hiring process just as you would for employees. You should run checks on potential ICs including their background, credit and arrest history.
- For large projects, include a calendar of progress report dates, so you can ensure the project remains on track. This also avoids you making the huge mistake of micromanaging. You get a report at the appointed day and time. Otherwise, you are free to do what you need to and the IC remains free to do what they need to do.
- Determine the appropriate payment method. Some small projects work well as a flat rate item. Some large projects require an hourly rate. While you cannot set the hours an IC works, if you are paying them an hourly rate, you should require a detailed time log. This is not something you will receive for flat-rate projects.
- If you provided the IC access to your network or on-site computer systems, change the passwords as soon as the project is complete. Delete their access to your system.
- Consider working with freelancers or ICs through an established cloud service like Freelancer or Upwork. These agencies solve the problem of where to find the best app developers or the ideal virtual assistant. They provide virtual desks and cloud storage, chat, video and telephone conferencing all built into one site. You can find ICs, interview them and work with them on the sites. The agencies take care of the paperwork such as the I-9 forms and generate tax forms. This leaves you with only the project document and NDA to create.
Contracting with freelancers provides a simple way to accomplish work in an efficient, expert manner. As long as you can handle simply handing the assignment to someone and letting them do it their own way – as long as it remains legal and moral – contracting with freelancers can help you cheaply accomplish a lot of work in a little time.