It is no secret that the tech world relies upon freelancers. Coders, bloggers, website designers, and photographers, among others in the industry, are often engaged as independent contractors instead of traditional employees. The benefits to companies are obvious. They avoid payroll taxes, overtime wages, and employee benefits costs, all while getting the labor they need at a moment's notice.

That's the good news for digital media companies. The bad news is that the IRS and other government agencies are cracking down on independent contractor misclassifications. Many digital media companies, especially those that have relied on freelancers to stay nimble and fuel rapid growth without an established Human Resources infrastructure, are now learning the hard way that the independent contractors they engage are actually employees. And independent contractor mistakes can be very expensive—they often result in costly government audits, fines, and class action lawsuits.

Whether an individual is an independent contractor or an employee depends on a long list of factors. The most significant issue, however, is usually a question of control. That is, how much control does the company exercise over the manner in which the individual performs the work? To answer that ultimate question, courts and government agencies will often consider the following factors:

  • Whether the individual must perform work pursuant to a specific schedule, e.g., Monday through Friday, 9 a.m. – 5 p.m.
  • Whether the individual is free to perform work for other companies
  • Whether the company provides the individual with equipment needed to perform the work
  • The length of time the individual performs work for the company
  • Whether the work the individual performs overlaps with work performed by the company's employees
  • Whether the company engages an entity (e.g., a limited liability company or corporation) or, alternatively, contracts directly with an individual
  • Whether the company trains the individual on the manner in which work should be performed
  • Whether the company provides the individual with benefits typically provided to employees (e.g., health insurance or retirement benefits)
  • Whether the individual invoices the company or, alternatively, the company pays the individual in a manner similar to its payment of its employees (e.g., a bi-weekly salary)

To minimize the risks of misclassification, digital media companies should ensure they avoid exercising too much control over their individual contractors. That is not always an easy task. Companies must strike a proper balance between proper classification and retaining sufficient control over the individuals they pay to complete the tasks and accomplish the business goals for which the individuals were hired. Here are five tips for companies to help avoid the risks of misclassification:

Tip 1: Engage a Company Instead of an Individual

It's not a dispositive factor, but government investigators often afford a great deal of weight to whether there is a contract between two entities, as opposed to a contract between a company and an individual. This is usually easy to accomplish. Companies simply need to insist that their independent contractors set up an entity through which invoices are billed and services performed. It's often a good idea for other reasons, too, such as the independent contractor obtaining commercial liability and workers' compensation insurance to protect against potential liabilities.

Tip 2: Avoid an Exclusive Engagement

One of the hallmarks of an independent contractor relationship is a contractor's ability to work for other principals. That means non-competition agreements with independent contractors should typically be avoided, subject to a conflicts of interest clause. To the extent possible, companies should also avoid giving contractors tight deadlines that require full-time engagement for an extended time period. Emergencies arise, and that's ok, but a contractor's performance of work for multiple principals at the same time will often go a long way toward proving a proper independent contractor classification.

Tip 3: Don't Believe the Short-Term Engagement Myth

Too many companies believe that a short-term assignment means an individual is necessarily an independent contractor and not an employee. That is a common misunderstanding. While the length of engagement is a factor, an individual who performs work for only a relatively short period may still be an employee. This is especially the case if the individual is performing the same work as the company's employees. Companies should always evaluate the factors above when classifying an individual as an independent contractor, regardless of the length of the engagement.

Tip 4: Don't Give Independent Contractors a Company E-Mail Address

Government investigators often inquire about what, if any, equipment a company provides an individual. Company equipment includes e-mail addresses. Accordingly, in most cases, independent contractors should not have access to a company e-mail address. A company e-mail address is more typical of a traditional employee relationship. Therefore, companies should require that independent contractors use their own e-mail addresses instead of company-affiliated e-mail addresses. While this could be challenging for security reasons, especially where the digital media company is providing services for clients that require a strict security protocol, the company should seek a technology solution that does not involve the use of company e-mail addresses or other company equipment.

Tip 5: The Method of Payment Matters

Independent contractors should not be paid like employees. That means companies should not pay their independent contractors an annual salary or an hourly wage pursuant to a predetermined work schedule. Instead, independent contractors should be paid per project, if possible. Companies should also require their independent contractors to submit invoices for the work performed and the payment owed.

These are just some of the suggestions for strengthening an independent contractor classification. In addition to considering the above-referenced factors, companies should always memorialize the terms and conditions of their engagement of an independent contractor within a written contract. A well-drafted independent contractor agreement is often one of the best exhibits for a company's response to a classification audit. As always, companies should consult with legal counsel before classifying an individual as an independent contractor.