T. Randolph Catanese, Esq. © 1999. All Rights Reserved.
In our last segment we discussed why it makes sense for a company to use an independent contractor as opposed to an employee. Instead of taking on the burden of ongoing overhead including matching tax deposits and unemployment deposits, for many new companies it makes better business sense to use independent contractors who are paid for a specific project and are not part of the ongoing overhead. Furthermore, many independent contractors bring years of experience to the table to assist the budding entrepreneur in his or her business.
However, the use of independent contractors is not without risk. Where practicable, the business owner should use a written agreement between the company and the independent contractor. This is so for several reasons.
As a respected Westlake Village business lawyer, with almost 20 years experience and a high quality team including Los Angeles litigation attorneys and Ventura County business lawyer, our first advice for you to use an independent contractor is to confirm by written document that the independent contractor is just that, an independent contractor and not an employee. Otherwise, if there were an audit by a state agency there may be a finding that the independent contractor is an employee which would entail penalties and interest for failure to make timely payroll tax deposits. Also, if a person performing the work were to claim that they were actually an employee and not an independent contractor, additional problems would arise if they claim, for example, unemployment.
Another issue which is of equal importance is the issue of whether or not the independent contractor is an agent of the company. Under the law an agent is someone who is invested with authority by the principal (the company) to perform acts or duties on behalf of the principal and whereby third parties are led to believe that the independent contractor has the authority to act on behalf of the company. In short, an agent is someone who is given authority to transact for the business and third parties are led to believe that he or she can do just that. Again, to avoid confusion it is important that the written agreement confirm with the independent contractor the scope of their engagement (or scope or their duties). In doing so the company should make it clear to the independent contractor that they are not permitted to contract on behalf of the company or otherwise cause the company liability. As an additional hedge against a potential problem, the company should also make sure that third parties know that they are to transact with authorized officers of the company and not third-party consultants unless otherwise agreed.
An independent contractor agreement should also include provisions for ownership of intellectual property if the independent contractor is providing intellectual property to the company. For instance, if an internet company is hiring an outside independent contractor to perform computer programming or artwork for their internet web site, it is imperative that the independent contractor agreement recite that the work is being performed "for hire" and that the work is entirely owned by the company free and clear of any claims of ownership by the independent contractor. Otherwise, if the written agreement does not provide this language, or if there is no written agreement at all, a dispute could arise that the independent contractor, though allegedly independent and paid by the company for the work, owns the computer code or the artwork.
To summarize what has been discussed so far: the independent contractor relationship allows the company to access human resources without taking on the concomitant burden of ongoing overhead; and an independent contractor relationship is best confirmed in writing to avoid any unintended negative consequences by reason of the independent contractor being classified as either an employee or an agent of the company. Look for the next installment which addresses confidentiality and trade secrets between the entrepreneur and the independent contractor.