How to Write an Independent Contractor Policy

As organizations are navigating the retention tension of the Great Resignation, many are looking for more creative staffing solutions than simply hiring full-time employees to fill all open positions—no easy task in the best of times.

If you’re considering hiring independent contractors to help your organization bridge the productivity gap, it’s important to stay compliant. Here’s how.

What is an Independent Contractor?

An independent contractor is a self-employed individual or organization that provides services to another individual or organizations under terms laid out in a contract. By definition, contractors are not employees. They are sometimes referred to as “gig workers.”

An organization might pay an employee and an independent contractor for the same or similar work. But according to the IRS, if an organization has the “legal right to control the details of how the services are performed,” then an employer-employee relationship exists.

Independent contractors typically have the flexibility to make their own schedules and to work for multiple organizations simultaneously. However, they are not protected by employment and labor laws, such as the Fair Labor Standards Act (FLSA). Gig workers are also ineligible for most of the benefits and perks offered to full-time employees.

Whereas employers are required to withhold payroll taxes from employee paychecks, independent contractors are responsible for withholding and paying their own self-employment taxes—including Social Security and Medicare. 

Many employers use independent contractors for special projects, greater convenience, and the lower costs associated with the contracted relationship. Contractors can also help employers stay productive and profitable when it’s difficult to fill key positions.

Why Do Employers Need an Independent Contractor Policy?

Since independent contractors are not protected by employment law and are ineligible for benefits, employers are at risk of noncompliance when they misclassify employees as gig workers, whether deliberately or not. 

However, the distinction between independent contractors and employees is not always clear. In fact, according to the US Department of Labor (DOL), 

The U.S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation which controls.

Still, the DOL highlights the following factors, which the Supreme Court has considered to be significant in determining worker classification:

• The extent to which the services rendered are an integral part of the principal's business.

• The permanency of the relationship.

• The amount of the alleged contractor's investment in facilities and equipment.

• The nature and degree of control by the principal.

• The alleged contractor's opportunities for profit and loss.

• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
• The degree of independent business organization and operation.

During the final days of the Trump administration, the DOL issued a ruling that was designed to implement an “economic reality” test to determine the independent contractor status of a worker. After a change in presidential administrations, though, the clarification was permanently withdrawn in May 2021.

SHRM notes that—even though “no bright-line test exists” to determine worker classification—“a wealth of information is readily available to help organizations make the necessary case-by-case determinations.” Check out SHRM’s Independent Contractor Resource Center for a deep dive into proper classification.

With this in mind, if your organization currently hires gig workers—or plans to hire them in the future—you should have an independent contractor policy in place to stay compliant and consistent.

What Should be Included in an Independent Contractor Policy?

Your organization’s independent contractor policy should be added to your Culture Guide or employee handbook and include the following:

• a requirement that managers coordinate with HR when hiring contractors
• a requirement that all contractors sign an agreement that stipulates the details of their relationship with the employer, including:
  • names and locations of your organization and the contractor
  • services rendered and responsibilities of the company to the contractor and vice versa
  • compensation, including how the contractor will be paid and when
  • length of contract term
  • language asserting the contractor’s independence over how services will be performed
  • a provision clarifying the contractor’s responsibilities to provide their own tools and equipment

• a requirement that all contractors complete Form W-9
• an explanation of how your organization will use the contractor’s personal data and how the contractor should protect company and client data
• a reminder that the organization may track time for billing, but may not dictate a contractor’s schedule
• any relevant information required by state law

Hiring independent contractors can help your organization solve temporary staffing issues and may even become a long-term approach to meeting productivity needs. But it’s important to make sure that noncompliance doesn’t lead to more hassle—or worse, penalties.

Additional Resources

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