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."