377 - Everything You Need to Know Before Onboarding a Contractor (and if They Should Even Be a Contractor At All)
On today's episode of the podcast I'm
Download the Contractor Onboarding Toolkit at notavglaw.com/toolkit. Inside you'll find the State by State Contractor Classification Cheat Sheet, the California Contractor Compliance Framework. and the Essential Contract Considerations for Your Contractor Agreement.
When going through contractor onboarding, we need to go through a few steps:
1. Determine if someone is a contractor or employee
This is the first layer of protection on my Legal Layers of Protection. Layer 1 is protection, and it's basically just "don't break the law." This is why you need to make sure your new hires are classified correctly, because misclassification is illegal and there are interests and penalties when you get audited. These laws are dictated by state. This is where the State by State Contractor Classification Guide in our Toolkit comes in handy. Each state has different classification laws, with about 30 states using the ABC test. California is known for enforcing it the most after they passed the AB5 Law. You can implement this test with our , and you can learn more about that in the California Contractor Compliance Framework
Part A - Control - You can't have too much control over your contractors and their work.
Part B - A business owner may not provide services that are within the usual course of the hiring entity's business. For example, a lawyer hiring a lawyer to provide legal services, a photographer hiring a second photographer, these would need to be employees. It's not just this simple, it's anything that's integral to your business that you're doing all the time. This is the part of the test that a lot of people fail.
Part C - Someone can only be a contractor if you're hiring them to provide a service that they already have a business doing. For example, if you're hiring a photographer who has a photography business to come do your brand photos.
2. What type of contractor are they?
If you've determined them to legally be a contractor, ask yourself if they are working in your business or are they a project-based contractor? If you are a project-based contractor, you may consider yourself a service provider offering B2B services. If you are the service provider, you are likely the one to provide the contract versus the person hiring you giving you a contractor agreement. Also consider who's leading the conversation? Be careful to avoid the use of the term "controlling" the situation, as that brings you back to test A on control.
3. Contractor onboarding
If the contractor is the one leading the conversation/process to provide you the service, they should be providing you the contact, sending you the invoices, etc. When hiring a contractor, make sure you get a contractor agreement, ideally a copy of their business license (in some states they need to have their own business in order to be a contractor), and have them provide you a W9 (get this up front so you don't have to chase them down for a 1099 later on).
What should go in the contract?
You want their address, you want to specify the exact services they'll be providing, you want to outline the payment terms and you want provisions in there that this is a work-for-hire agreement. You can find all of these in the Contractor Agreement in the Contract Club (notavglaw.com/club). I also recommend a sophisticated onboarding tool (I use Gusto) to connect the W9, their ID and all the necessary tax information and then Gusto will automate the 1099 come tax time.
It's important to note that before hiring a contractor or employee, you want to have an LLC and just generally have your shit together. If your business is already messy, it can look even messier once you start to bring outside people in. I dive into this more in my book, Unf*ck Your Biz (available at notavglaw.com/book).
Download the Contractor Onboarding Toolkit at notavglaw.com/toolkit. Inside you'll find the State by State Contractor Classification Cheat Sheet, the California Contractor Compliance Framework. and the Essential Contract Considerations for Your Contractor Agreement.