The September issue of Entrepreneur Magazine contains a good article, entitled "Freelance Nation," that has key tips for making outsourcing work.

While reading the article I thought of the many business owners who meet with me to create independent contractor agreements, only to find that the relationship they describe is actually that of employee and employer.  Just because you want a relationship to be outsourced, doesn't mean it is.

I'm reminded of the old saying: "If it looks like duck, walks like a duck and quacks like a duck, it's a duck." 

Business owners want to avoid hiring employees because they don't want the tax and paperwork hassles, they don't want to pay the employer portion of FICA and Medicare, the cost of additional benefits and the additional workman's compensation premiums, and they want the flexibility to terminate the relationship without unemployment claims. 

While those are big hassles to be sure, improperly calling an employee 'independent contractor' will create bigger problems for your business.

First, if your business is required to withhold taxes and pay the employer portion of FICA and Medicare to the IRS, you'll face stiff penalties and interest for failing to do so.

Second, the employee may be subject to minimum wage and overtime laws.  If you don't have adequate time records and the "employee-called-contractor" makes a claim for wages based on hours worked that you can't refute, your business (and possibly you) could be on the hook for damages and the employee's attorneys fees.

And realize that the employee's attorneys fees are the worst part.  A Florida statute allows the employee's attorney to recover attorney fees if there are wages due the employee. 

Contingency fee lawyers are suing small and medium sized businesses mostly to recover big fees.  Even if the employee-called-contractor recovers only a few hundred dollars, the lawyer will demand five figure legal fees.

Third, if the employee-called-contractor is hurt 'on the job' he might be entitled to workman's compensation benefits.  His claim starts the ball rolling on the other problems.

Finally, because claims only come up when the employee-called-contractor becomes unhappy with your business, you leave yourself vulnerable to big demands for money.  Even if you have a valid defense, the downside risk is so great that you cave-in to unreasonable demands rather than risk other problems.

As a result, it's critical to know how the law characterizes the relationship you've created.  The IRS provides guidance and examples at its website (http://www.irs.gov/businesses/small/article/0,,id=179116,00.html).

Of course, give me a call if you'd like to discuss this further.

Events.

This evening I'm speaking at the Disney Entrepreneur Center for the Small Business Development Center on 10 Common and Costly Business Killing Legal Mistakes.

On Monday, September 20, I'll be at the TRDA in Melbourne to talk about legal issues for the emerging technology business.  Topics will include corporate law, liability protection, raising capital and intellectual property issues.

On October 7, Scott Faris, of Astralis Group, and I will be speaking to Rollins College MBA students about terms sheets and raising capital for the emerging entrepreneurial venture.

Finally, on October 26, I'll be presenting the Legal Foundations portion of the UCF Techology Incubator Excellence in Entrepreneurship Course.

Thank you for your continuing referrals.

Ed