You may no longer be an employee of someone else's company, but that doesn't mean you no longer work for others. Many homebased business owners work as independent contractors for other businesses or organizations, providing expertise on short- or long-term projects. But what happens if the relationships you develop within those other companies go sour? What if you become a victim of racial or sexual harassment? What if you believe the people who hired you have discriminated against you in ways they couldn't discriminate against standard employees? The rules of the game are different for independent contractors.
Consider a case decided in 1997 by California's Court of Appeals. A recreational facility declined to renew the contract of its dance program director, a homebased independent contractor. The dance director suspected the termination was racially motivated, because she'd complained her freelance instructors were being taunted by the staff about working for a white woman. Upset, she sued over illegal discrimination. She never had a chance to present her evidence in court, however, because the trial court noted that the state and federal laws against racial discrimination were designed to protect employees--not independent contractors. The state Court of Appeals agreed. However pernicious racial discrimination might be, the judges observed, the law simply doesn't allow such claims by independent contractors.
That fact doesn't bother Stanley Janusz, a homebased computer consultant in Island Heights, New Jersey. A former product-safety manager with Atotech USA Inc., Janusz left the company five years ago to launch JANUS Environmental Management Inc., which now encompasses both his own computer services and wife Maria's medical transcription business. "When you leave the world of being an employee, you lose that protection," Janusz says. "At the same time, you gain more control over your life. If you see something you don't like, you can leave." He notes that, according to the IRS guidelines, an independent contractor shouldn't work for only one company. Having more than one source of revenue allows the independent contractor to stay in business should one contract go bad. As Janusz points out, "You can terminate the contract as easily as they can."
Freelance writer Jane Easter Bahls specializes in business and legal topics.
Who's In Charge?
Many companies try to blur the distinction between employees and independent contractors, says Jeffrey L. Braff, an attorney with the Philadelphia office of Cozen and O'Connor. For example, an employee who's been working for the company decides life would be better if she were working from home. The company sets her up with a fax machine and tells the IRS she's an independent contractor, even though she's working only for that one company under her manager's supervision. "Nothing changes except the location," Braff says. "That [person] is clearly not an independent contractor."
Likewise, in a highly publicized case, a group of programmers working on a long-term project for Microsoft had signed documents saying they were independent contractors but later sued the company for inclusion in its benefits program. The programmers had worked full time for 18 months in the company's offices, side by side with full-time employees and doing similar work, so it was hard to tell the difference between the two. The Ninth Circuit Court of Appeals declared they were truly employees.
So what's the difference? According to the 20-factor guideline issued by the IRS, the key issue is control. Independent contractors provide their own equipment, set their own hours, pay their own expenses, hire their own assistants, and control the way they do their own work. They're free to work for as many companies or organizations as they wish, even fierce competitors. Employees work hours set by the employer, use the employer's equipment and work under the employer's supervision.
In a recent Illinois case, a sales representative whose contract was terminated by an engineering firm sued over age discrimination. The firm argued that the sales rep had no claim because he was an independent contractor, not an employee. The U.S. District Court for northern Illinois agreed, noting the firm did not tell the sales rep when to call on customers, did not require him to submit call reports, did not manage his daily operations, withheld no taxes, provided no benefits and never paid his expenses. Whether or not the firm discriminated, the contractor was in no position to sue.
The appellate judges in the case of the California dance program director noted that the distinction between employees and independent contractors works well for all concerned. "Independent contractors typically have greater control over the way in which they carry out their work than employees, and businesses assume fewer duties with respect to independent contractors than employees," they observed in their opinion. "Thus, the independent contractor status provides the hiring party and the worker with an alternative relationship that gives each more freedom and flexibility than the employer-employee relationship."
Along with freedom and flexibility, independent contractors also gain more responsibility than employees--including the responsibility to watch their backs. While employees are protected from discrimination on the basis of age, sex, race, religion and national origin by Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 and statutes in many states, independent contractors have fewer legal protections.
"When you're an independent contractor, both parties are bound by the terms of the contract," says Jan Caldwell, an attorney who works from her home office in Bethesda, Maryland, and serves on the board of the American Association of Home-Based Businesses. "There's a presumption you don't need that kind of protection." While employees in most states can be fired "at will," which means for a good reason, a bad reason or no reason at all, says Caldwell, a contractor who is fulfilling the terms of a contract doesn't have to worry about getting fired. If you do the job, you get paid. "We're talking about a power balance," Caldwell says. "An independent contractor shouldn't have the same power imbalance as an employee."
If you have employees of your own and place them in your client's workplace for the duration of a contract, be aware that if those employees are subjected to sexual or racial harassment, their recourse might be a suit against you. Braff notes that, under the rules of the Equal Employment Opportunity Commission, if you know your employees are being harassed by a third party and take no action, you're liable. If your employee never mentions it, however, even the EEOC won't hold you liable. "If you find out, take it up with the company," Braff says. "Don't just stick your head in the sand."
If you're worried about the lack of protection you have as an independent contractor, you might consider addressing harassment and other issues in your contract. Caroline Hyman Brooks, an attorney in Narberth, Pennsylvania, who has prepared contracts for independent contractors, recommends independent contractors include a clause in the contract stating that the hiring company is responsible for what goes on at the workplace and will indemnify the contractor for unlawful actions by its employees. That doesn't necessarily get the contractor off the hook, she says, but it does provide another pocket for paying damages.
However, she cautions, beware of making the wording too onerous. "You can include an indemnify-and-hold-harmless clause for anything, but the company may not sign it," she says. After all, one benefit of the whole arrangement for the hiring company is to minimize liability. "That's why they hire independent contractors," she adds.
Presenting contracts with too many strings attached is a good way to lose out on work, says Los Angeles attorney Drew Pomerance of Roxborough, Pomerance & Gallegos LLP, who represented the dance instructor. "You'd have to be very unique and good at what you do for them to sign it," Pomerance says.
Debra Schacher, founder and CEO of the Home Office and Business Opportunity Association, advises independent contractors to keep their eyes open when entering into a contract with a company. "You can see the red flags go up," she says. "If you get into a situation that looks discriminatory, don't go forward." If the issue is sexual harassment, she says, "Keep your guard up, watch for signals and dispel them immediately." In some cases, she adds, the person doing the hiring is simply a jerk--and being a jerk is not illegal. It's up to you as the contractor to hold yourself out as a professional. "All you have," says Schacher, "is your wits about you."
If things go wrong and you end up in a lawsuit, remember, you have no employer paying insurance premiums for you and no larger company to shield you from personal liability. It's up to you to carry unemployment compensation and workers' compensation policies for yourself and your employees. Check with your attorney, local chamber of commerce or SBA office about requirements.
"Get tons of insurance," advises Brooks. That might include general liability coverage, professional liability coverage, and possibly an errors-and-omissions policy.
In addition, she advises homebased businesses to consider the benefits of incorporation: The owner of a corporation is shielded from personal liability for business decisions, unless there's been gross negligence or fraud. Incorporation could also provide needed protection if the employees you place at a client's workplace sue you over their treatment there.
Although many homebased business owners wait for serious growth before considering incorporation, Janusz incorporated before he even started his business. "I wanted to go in as a corporation right from the start," he says. Why? He ticks off four reasons: credibility with clients, protection from liability, preparation for growth and clarification of his role as an independent contractor. "I'm an employee of JANUS Environmental Consulting Inc. and no one else," he says. "I didn't want to be perceived as someone else's employee."
The Contract Issue
Your best protection as an independent contractor is the contract itself. Write your own contract and customize it for each project. Make sure it states that you're an independent contractor who will be using your own equipment, setting your own hours within guidelines established by the hiring party, and that you'll be responsible for handling your own taxes. Specify where the work is to be performed, how often you need to report to the hiring company and, of course, when and how much you'll get paid.
The contract is a good place to add some legal protections. Who's liable if things go wrong? For instance, Beverley Williams, a public speaker and president of the American Association of Home-Based Businesses, states in her contracts that proofreading is the responsibility of the client. "I can't be responsible for proofing my own work," she says, noting that clients who hire her can either do their own proofing or pay her to hire a proofreader. "I've had cases [to do desktop publishing] where the client missed something, the material went to print with errors, and they wanted me to redo it."
Especially for major contracts, it's better to run your contract past your lawyer initially than to pay later to fix problems. For smaller contracts, your standard computer-customized contract should be enough, but consider having your lawyer look at the standard contract to make sure you've covered all your bases.
If you experience harassment or discrimination, remember that your status as an independent contractor precludes you from winning a lawsuit under employment laws, so you'd be better off not suing. "It could harm a business owner to sue a company when the protection is nonexistent," Schacher says, especially if word gets out you're an independent contractor who sues clients over perceived wrongs. "You could get blackballed right out of the industry." A better bet: Keep your head up, and look for other clients.
Get It In Writing
When you need assistance or expertise, using an independent contractor often makes more sense than hiring an employee. There's less paperwork and no need to pay employment taxes. When the independent contractor you hire doesn't provide a contract for you to sign, it's still important for you to put the requirements of the job in writing. Beverley Williams, president of the American Association of Home-Based Businesses, was hired as an independent contractor a few years back to produce a quarterly newsletter for teachers in her county. At the time, Williams' business included desktop publishing, but not writing or photography. She subcontracted with a reporter and a photographer to cover school district events. "I wrote their contracts and had my attorney look at them; he suggested some changes in the wording," she says. "It was fairly simple."
Williams reports her primary goal was making sure the contract met IRS guidelines, so she wouldn't be found to have employees. Accordingly, the contracts stated the subcontractors would set their own hours, provide their own supplies and equipment, and be responsible for paying their own taxes. The contracts also included expectations for the format of the work produced, such as providing negatives with contact sheets.
Jan Caldwell, a homebased small-business attorney in Bethesda, Maryland, advises business owners to address control issues in the contract. In addition to specifying that contractors use their own equipment and set their own hours, the contract should address where the work is to be done. To avoid the appearance of having an employee, the work should normally be done on the contractor's own premises, unless the nature of the project requires having the contractor at your home office. Also include how often the contractor must report to you, as well as the terms of payment.
"If you hire an independent contractor and need to do a lot of supervising," says Caldwell, "you may need to bite the bullet and hire a part-time employee."
Jeffrey L. Braff, c/o Cozen and O'Conner, 1900 Market St., Philadelphia, PA 19103
Caroline Hyman Brooks, 109 Forest Ave., Narberth, PA 19072, (610) 664-3630
Jan Caldwell, firstname.lastname@example.org
Home Office & Business Opportunity Association, 92 Corporate Park, Ste. C250, Irvine, CA 92606, fax: (949) 589-1311
JANUS Environmental Management Inc., P.O. Box 217, Lavalette, NJ 08735, (732) 929-3500
Roxborough, Pomerance & Gallegos LLP, (310) 470-1869, http://www.rpglaw.com