Independent contractors control the “how” and “when” of the work or services they provide. Employees, by contrast, are required to perform work as directed by the employer. This means that true independent contractor arrangements have fewer regulations than those that govern relationships with employees. Still, companies should exercise the same degree of care in managing their relationships with independent contractors – including entering into a written agreement. Here are three of the most common dangers of failing to adequately define the independent contractor relationship:
Commissions Disputes. Michigan’s Sales Representative Commission Act mandates that commissions earned by independent contractors be released in a timely manner and provides that an intentional failure to pay commissions can result in liability for triple damages, attorney fees and court costs. To avoid a costly legal dispute and a potential “he said, she said” situation, agreements should be clear about how and when commissions will be paid.
Inability to Enforce Non-Competition, Non-Solicitation and Confidentiality Restrictions. An independent contractor’s ability to compete with the company or solicit business post-termination can be limited through written non-competition and non-solicitation provisions. While it is typically more difficult to enforce non-compete and non-solicitation obligations against independent contractors than employees, a carefully worded agreement has the best chance of withstanding judicial scrutiny. Similarly, a company can better protect itself against stolen trade secrets by using a written agreement to define what constitutes protected information and how such information can be used.
Misclassification Risks. Misclassifying employees as independent contractors can have serious consequences – including exposure for unpaid withholding taxes and overtime pay. A written agreement can help show that a worker has been properly classified as an independent contractor as opposed to an employee.
Companies should think twice before “cutting corners” in their dealings with independent contractors. Neglecting to outline the relationship in writing or using a “one size fits all” agreement can pose serious legal and practical risks. If you are interested in reviewing your practices relative to independent contractors, please contact us today.