If you’re like many small business owners, you hire at least a few independent contractors, instead of regular employees. And, why not? With independent contractors, you don’t have to take care of payroll taxes, unemployment insurance, and a host of other taxes and benefits. So, you not only save a bundle, but you also have a lot more flexibility than you do with a full-fledged staffer.
It’s no wonder that the use of contingent workers is growing at record levels, according to SurePayroll, a Glenview, Ill., payroll processing company that serves small businesses.
There is a hitch, however. When it comes to legal requirements and management considerations, an independent contractor is completely different from a regular employee.
By definition, they’re not a full-time part of your organization. Plus, they probably work for some – perhaps many – other companies, so their loyalties aren’t the same. What’s more, legal definitions of independent contractor status restrict how you can supervise them.
As a result, independent contractors require a different management approach. Here’s what you need to know:
Learn the rules—and how they affect your supervisory tactics.
Your first step is understanding the rules for who qualifies as an independent contractor and the implications for management. Unfortunately, that’s easier said than done, because there’s no uniform definition.
“Determining whether someone is an independent contractor is one of the most complex areas of law facing any business owner,” says Walt Branam, director of compliance services for Collabrus, a San Francisco firm that helps companies manage independent contractors. Worse, a host of federal and state agencies, as well as Congress, are cracking down on what they see as rampant misclassification of independent contractors.
Still, there generally is one underlying theme when determining whether or not someone is an independent contractor: how much control you have over their work. Meaning, for example, if you give directions that are too explicit, or dictate the specific hours the individual has to work, you’re not really treating them like they're an independent contractor. As a result, you need to be more hands-off.
“You should manage for output and results, not specific activities,” says Michael Alter, SurePayroll’s president.
Be smart about how you pay.
For one thing, Alter suggests compensating independent contractors based on reaching certain goals or on a fixed fee, rather than by the hour. That’s because you’re generally paying them for completing a project, not for doing ongoing work. You also don’t want to pay them for time spent, say, fixing a computer problem; that’s something they need to take care of without a meter running.
At the same time, you should not under-pay just because they’re independent contractors. Your goal is to create a partnership. You’ll undermine the relationship – and create resentment – if your compensation level is Scrooge-like. For that reason, you need to do your research beforehand to get an idea of acceptable pay levels.
Use a similar hiring process to the one you use for employees.
You still need to interview candidates, check references, test their capabilities, if appropriate. “If I’m hiring a programmer to do C++ programming, I need to know they know how to do C++ programming,” says Alter.
But your interview questions should focus on the ability and skills needed to work on a defined assignment, rather than a broader set of competencies.
Look for individuals with staying power.
That means selecting candidates who seem likely to continue working as independent contractors for a while, rather than people simply biding their time until they get a regular job. And, while they should have a track record, it's also not a good idea to hire someone who has so much on their plate that they’ll give your company short shrift.
You should ask such questions as how long they’ve been doing this type of work, their future plans, and other clients they work for.
Start with small, non-critical projects.
To make sure they’re a good fit, give them small tasks to begin with. When you see they’re reliable, then start assigning bigger or more complex projects.
Stay in touch after the project is over.
You never know when you’ll have a sudden need for an independent contractor with the same skills. So, make sure you know how to get in touch with people after a project is completed, and maintain contact.
Says Alter: “I can’t tell you how many times we’ve used someone, thinking we’d never use him again, only to find eight months later, we need him right away.”