Lesson on Hiring Independent Contractors

17 replies
I thought I'd pass this bit of information along for anyone that's thought of hiring an independent contractor on a commission only basis.

When I thought of expanding my business a few months ago I had every intention of doing exactly that. That is until I started doing some in-depth "cover my backside" research.

Basically, it comes down to this. If you hire an individual to work on commission, they are not considered to be an independent contractor in the eyes of the IRS unless the two following things apply:

#1. You cannot keep them exclusive to your business. They must be able to freely sell products for any other company that they wish in addition to yours.

#2. If you have to provide any product training, training materials, etc in order for the individual to do their job, they're an employee, not a contractor.

The only way to overcome these two issues is to guarantee them an hourly wage or commission, whichever is greater.

Example, you could guarantee them no less than minimum wage and simply make up the difference between what they've earned in commissions to achieve that minimum.

You still can't prevent them from working for someone else during their non-work hours. You could fire them for it, though. I would. It would seem like a conflict of interest to me, especially if I trained them.

That being said, this information is based on my own research and a consultation with my accountant. She basically told me that people are still doing it to avoid having to pay taxes, unemployment, health insurance, etc, but if the IRS catches you it WILL suck!

I just thought I'd pass that along.


Joe
#contractors #hiring #independent #lesson
  • Profile picture of the author J R Salem
    Joe, good info, there are pitfalls to IC vs Employee, on both sides.
    {{ DiscussionBoard.errors[8188953].message }}
  • Profile picture of the author MaxwellB
    That's not entirely true.

    You provide product information to a lot of different people your outsourcing work to whether it's a call center, answering service, outsourced marketing company or consultant so that they may know what your business/product is about and how to handle the work you are outsourcing to them.

    Your first point is not really a big deal because your paying them a commission not a salary so you need to have the mindset that they are not yours exclusively in the first place, if that's not okay with you then commission sales reps are not something you should ever consider because that's standard.

    You can cover yourself with NDA's and a independent agent agreement that prohibits them from using your company information/product information anywhere but in their work for you.

    As for your second point your accountant may have been misunderstood or just very cautious. According to the IRS:

    Independent Contractor Defined

    They ARE an independent contractor if you only direct the end result (sell my products) and not how or when they do it.

    Which is what you do with a commission sales rep. They are experienced professionals and know how to sell....you leave it up to them to sell your products (result) and they can do that however they want.

    You can give them suggestions (verbal) on how to do it like explaining to them your sales process that is working now, but leave it up to them how they end up doing it.

    And let's be real here, even if you did require they do a certain sales process verbally, the IRS will never find out, and if they agree to work for you they will never tell the IRS because they are independent sales reps they WANT to be IC's they don't want to be employees, they make their living on a commission it's the type of people they are.

    There's really no danger or extreme caution needed in hiring commission sales reps as long as you don't formally tell them WHEN they need to work..that's the only thing that really makes the clear distinction.
    Signature
    Get featured on Forbes, Inc, Entrepreneur, Bloomberg and other major media publications - Gain instant trust, credibility and close more sales!

    {{ DiscussionBoard.errors[8189002].message }}
  • Profile picture of the author Mwind076
    I was about to write a long response, but MaxwellB beat me to it. He's spot on.

    In short -
    #2. If you have to provide any product training, training materials, etc in order for the individual to do their job, they're an employee, not a contractor.
    That is incorrect. You can't expect anyone to do anything with you, for you or for your benefit without providing them with product info and materials. Whether I'm IC, w-9, your employee, or providing you with a service of sales, I have to know what you do, what you sell, what you offer, how much it costs, what you've done, what worked, what hasn't worked, what you expect, etc etc. Otherwise, you're not going to get anything you want.
    Signature

    Looking for answers on how to SUCCESSFULLY market your company?
    Cold Calling, Appointment Setting, Training, Consulting - we do it all!
    PM for more information

    {{ DiscussionBoard.errors[8189081].message }}
  • Profile picture of the author umc
    The IRS guidelines seem to have control as the determining factor, not simple points like you laid out. They have multiple points so as to make a determination, and they seem to go by the whole picture from what I've experienced and seen over the past 13 years. Basically, if you control the hours, services performed, supplies and equipment, and the person doesn't work for anyone but you, you've got an employee. In my business (cleaning), lots of homeowners hire people to clean and then dictate and provide all supplies and equipment, want to pay them hourly, and exercise control over timing, and that can easily create a headache for a homeowner if that cleaner gets hurt or doesn't file taxes, gets busted, and then claims to have been an employee. If you hire a real business for something, they should have other customers, be able to provide the professional service with their own supplies and equipment, take care of their own scheduling, etc. It all seems to come down to control. The more you want control, the more you want an employee. I've done lots of contract work in the past in various industries that provided lots of training for specific types of jobs, but I had to have the equipment, transportation, and schedule my own jobs with various companies as an IC.
    {{ DiscussionBoard.errors[8189176].message }}
  • Profile picture of the author Joe Stewart
    I could go back and forth over this but it's really not a good use of my time. I highly recommend that everyone research their own unique situation before making a hiring decision.
    Signature

    My New "Share All" Blog Is Coming Soon! Online & Offline Marketing, More!

    http://www.UnCENTSored.com

    {{ DiscussionBoard.errors[8189261].message }}
    • Profile picture of the author midasman09
      Banned
      "Poop On the IRS!"

      I've "hired" and "Trained" dozens of "INdependent Sales People"!

      I gave each one Sales Materials, Order Forms, Samples, etc....whatever they needed to "Get Orders"!....including 4 days of "Sales Trainig".

      Then....they went out and sold. I had a Burglar & Fire Alarm Co in Chicago then.

      They were totally on their own except for our weekly Sales Meeting at 2pm, Fri Afternoons.

      NOW....here's what I learned, QUICKLY, about Straight-Commission people":

      The mediocre ones will sap your energy and bring in mediocre or low results.

      The GOOD ones will bring in orders all right AND....they will try and see if they can "steal" your materials or whatever to "Start Their Own Biz"! Hey! What do they need YOU for? They can SELL!

      So....my first group of 6 Sales people....I had 2 who couldn't sell their way out of a paper bag (That's an old sales phrase)....2 were medium and 2 who "stole me blind"....kept ALL my sales stuff and, other materials to set up their own deal.

      So....pay close attention to what I'm about to tell you;

      1) Call your local Small Claims Court and find out what the Maximum amount to sue, is. (In my area it's still $2,500)

      2) Go down to your local Stationery Store and get some "Judgement" forms (I forgot the actual name of these but they say, the person signing these ALREADY OWES $2,500!)

      All that needs to be done to get the court to declare a "Judgement" is for the Clerk to sign it. This means you can then "Lock Up Their Bank Account Until they pay YOU 2,500".

      This STOPPED all shenanigans in it's tracks! Every single sales person turned in ALL materils I gave them and....I then tore up the "Judgement" paper.

      (I wish I could remember the name of that Form. But, Hey...someone at the Office Supply place should now what I'm referring to)

      Don Alm...reminiscing about his first business
      {{ DiscussionBoard.errors[8189310].message }}
      • Profile picture of the author Matt Lee
        Originally Posted by midasman09 View Post

        "Poop On the IRS!"

        I've "hired" and "Trained" dozens of "INdependent Sales People"!

        I gave each one Sales Materials, Order Forms, Samples, etc....whatever they needed to "Get Orders"!....including 4 days of "Sales Trainig".

        Then....they went out and sold. I had a Burglar & Fire Alarm Co in Chicago then.

        They were totally on their own except for our weekly Sales Meeting at 2pm, Fri Afternoons.

        NOW....here's what I learned, QUICKLY, about Straight-Commission people":

        The mediocre ones will sap your energy and bring in mediocre or low results.

        The GOOD ones will bring in orders all right AND....they will try and see if they can "steal" your materials or whatever to "Start Their Own Biz"! Hey! What do they need YOU for? They can SELL!

        So....my first group of 6 Sales people....I had 2 who couldn't sell their way out of a paper bag (That's an old sales phrase)....2 were medium and 2 who "stole me blind"....kept ALL my sales stuff and, other materials to set up their own deal.

        So....pay close attention to what I'm about to tell you;

        1) Call your local Small Claims Court and find out what the Maximum amount to sue, is. (In my area it's still $2,500)

        2) Go down to your local Stationery Store and get some "Judgement" forms (I forgot the actual name of these but they say, the person signing these ALREADY OWES $2,500!)

        All that needs to be done to get the court to declare a "Judgement" is for the Clerk to sign it. This means you can then "Lock Up Their Bank Account Until they pay YOU 2,500".

        This STOPPED all shenanigans in it's tracks! Every single sales person turned in ALL materils I gave them and....I then tore up the "Judgement" paper.

        (I wish I could remember the name of that Form. But, Hey...someone at the Office Supply place should now what I'm referring to)

        Don Alm...reminiscing about his first business
        That is some seriously good advice!
        Signature
        "One of the Most Successful Offline WSO's Ever!
        Get More High $$$ Clients with this Small Business Marketing PLR Magazine
        {{ DiscussionBoard.errors[8189732].message }}
        • Profile picture of the author SashaLee
          Originally Posted by Matt Lee View Post

          That is some seriously good advice!
          Actually, it's not.

          If it were that simple to just "lock up" someone's bank account then everyone would be doing. Working for a company who has sued people in every continent and has current large and small claim suits pending in America I can tell you that this is not how it works.

          Hire a lawyer.

          All the best,

          Sasha.
          {{ DiscussionBoard.errors[8190058].message }}
          • Profile picture of the author midasman09
            Banned
            Independent Contractor Update:

            The piece of paper that I bought from Office Supply Stores is called a....(fanfare)....

            PROMISORY NOTE!!!

            With this piece of paper (without a Lawyer) I can walk into the "Signee's" Bank.....present it to anyone sitting at one of the Information Desks in the Lobby and...
            Put a "Lock" on the account until the account owner satisfies ME!

            Which doesn't take long because the account owner (my Commissioned Sales Person) cannot withdraw any funds UNTIL he/she pays me!

            This may have changed in the last few yrs BUT, I don't think so!

            Don Alm.....
            {{ DiscussionBoard.errors[8191566].message }}
            • Profile picture of the author Mr. Subtle
              Originally Posted by midasman09 View Post


              PROMISORY NOTE!!!

              With this piece of paper (without a Lawyer) I can walk into the "Signee's" Bank.....present it to anyone sitting at one of the Information Desks in the Lobby and...
              Put a "Lock" on the account until the account owner satisfies ME!
              B.S.! You still have to get a judgement in a court of law.
              Signature

              {{ DiscussionBoard.errors[8191746].message }}
          • Profile picture of the author Joe Stewart
            Originally Posted by SashaLee View Post

            Actually, it's not.

            If it were that simple to just "lock up" someone's bank account then everyone would be doing. Working for a company who has sued people in every continent and has current large and small claim suits pending in America I can tell you that this is not how it works.

            Hire a lawyer.

            All the best,

            Sasha.

            I've been on the other side of the fence as well and I agree that hiring a lawyer is always the best course of action. Every situation is unique and although I wish that there were a "one size fits all law" where this is concerned, there's not.

            I've been one of those employees that chose to break away and start my own business. It wasn't because I wanted to steal from my employer, though. It's because they were stealing from us (there were 5 of us) by stiffing us on commissions and bonuses, and they were charging huge amounts of shipping on orders.

            Needless to say, we were angry, our customers were angry and we wanted out. The only problem was that we had all signed a confidentiality agreement. Basically an NDA.

            We all left after the first of the year in 1997 and went to work for someone else. I loved what I did and didn't want to leave, but their policies made it unbearable.

            About three months later I hear a knock on my front door and this gal hands me paperwork that said I was being sued for $40,000!

            I wasn't happy!

            Actually, three of us were being sued for $40k and the other two, former managers, were being sued for $100k. They were both homeowners and were pretty freaked out. Understandably so.

            Anyway, to make a long story short, I squashed them in court. It was a glorious day! I still have the judgment in my filing cabinet.

            That being said, a business owner "should" be able to hire sales reps without fear of having them take what you've taught them and start a competing business. I wouldn't even care if they started a competing business as long as they weren't targeting my company accounts. However, that's usually not the case.

            I completely agree with Sasha. Always consult an attorney before you hire and find out what your legal rights are in both the state you reside in and nationwide, in the event your employees/contractors decide to jump ship and turn on you without good cause.

            Joe
            Signature

            My New "Share All" Blog Is Coming Soon! Online & Offline Marketing, More!

            http://www.UnCENTSored.com

            {{ DiscussionBoard.errors[8191668].message }}
            • Profile picture of the author midasman09
              Banned
              A "side-note" here re having IN-dependent sales people SIGN a "Promissory Note"'

              Out of the hundred or so Sales Agents I had during the years I had them SIGN my "Promissory Note"....NOT ONE did I ever have a "problem" with, much less need to hire an attorney for.

              I call it a "Psychological-Intimidation". Whenever a commissioned sales person was even thinking about leaving....they brought in ALL my materials and had me tear up the Note!

              Don Alm
              {{ DiscussionBoard.errors[8191713].message }}
              • Profile picture of the author Joe Stewart
                Originally Posted by midasman09 View Post

                A "side-note" here re having IN-dependent sales people SIGN a "Promissory Note"'

                Out of the hundred or so Sales Agents I had during the years I had them SIGN my "Promissory Note"....NOT ONE did I ever have a "problem" with, much less need to hire an attorney for.

                I call it a "Psychological-Intimidation". Whenever a commissioned sales person was even thinking about leaving....they brought in ALL my materials and had me tear up the Note!

                Don Alm

                Having a new employee sign something as simple as a confidentiality agreement will keep most of them from causing you headaches later on, simply because they won't understand the law and will be intimidated by the agreement.

                However, there will always be some people that will try to strike out on their own. There's really not much that can be done about it either. I don't know the legality of Promissory Notes. I was under the impression that those were mainly used in real estate dealings, but I'll check into it.

                Non-Compete clauses are even very limited in most cases. There usually has to be some form of compensation given to the employee at the beginning of their employment in order for it to be enforceable. Even then, there are also time and geographical limits that most courts will look at in order to make a decision.

                From my own experience, and after reading about other cases, most courts may give a temporary restriction on an individual, something like 6 months, or the time expected for the damaged business owner to train a new employee. 6 months is the longest enforcement I've read about, but there certainly could be other cases that I haven't seen.

                The court tends to look at a person's right to work in their chosen field as much as anything else. If you get a job at McDonald's does that mean that you can't leave there after 5 years and start your own franchise? Nope.

                Where these cases can become very hurtful to small business owners is when it's a service related business or there are no physical products involved. Something where the former employee doesn't have a large financial barrier to entry. That type of business would concern me if I had repeat customers at stake.

                Anyway, please keep posting your experience. You've obviously had success with it, so I'd be interested in learning more. If it's something that could be done in multiple industries that could be a game changer for some business owners. Even if it works in some areas it would be useful.

                Joe
                Signature

                My New "Share All" Blog Is Coming Soon! Online & Offline Marketing, More!

                http://www.UnCENTSored.com

                {{ DiscussionBoard.errors[8191907].message }}
      • Profile picture of the author Mr. Subtle
        Originally Posted by midasman09 View Post

        They were totally on their own except for our weekly Sales Meeting at 2pm, Fri Afternoons.
        First red flag to the IRS that will turn your ICs into employees.
        Signature

        {{ DiscussionBoard.errors[8191742].message }}
        • Profile picture of the author Joe Stewart
          Originally Posted by Mr. Subtle View Post

          First red flag to the IRS that will turn your ICs into employees.
          That's not as big of an issue as I first thought. I was on the phone with the IRS for around 45 minutes this morning regarding the circumstances of hiring for my business. Basically, I wanted to know if there was a way to be able to pay commission only and still retain a certain amount of control.

          Regarding control, I told them that I wanted to hold a Q & A call once per week so workers could get their questions answered. I also wanted to have "recommended" business hours.

          Basically, I can say "based on my 20 years of experience, I know for a fact that it's best that you work between the hours of 8:00AM - 2:00 PM."

          I can also say that the Q & A call isn't mandatory, but that's the only time that I choose to be available.

          I can also say "those are the hours that I'll be available to help you with product questions, help you close an order, if needed, answer shipping questions, make verification calls for your orders (it's not an order until it's verified) and accept customer payments (it's not an order until it's paid for)".

          That being said, they can work any hours they want. On the other hand, if they decide to do their own thing and don't make enough sales to justify keeping them around, I can also fire them. :-)

          Here's the link to the IRS page regarding what are known as "Statutory Employees".

          Statutory Employees

          This is VERY cool. I'm glad I started this thread. If someone hadn't questioned my interpretation (and that of my accountant) I may not have dug deeper and found this out.

          Joe
          Signature

          My New "Share All" Blog Is Coming Soon! Online & Offline Marketing, More!

          http://www.UnCENTSored.com

          {{ DiscussionBoard.errors[8191823].message }}
  • Profile picture of the author McMissKathy
    I wouldn't say poop on the IRS. I look at a time coming when anyone doing any kind of business generating revenue over the internet to pay their fair share in taxes.
    I also see a ton of this garbage where peeps are working their tails off for table scraps change to make some side money to change.
    They have a minumum wage standard in the States for a reason!
    Look out World, it's only a matter of time before Big Brother closes all the gaps!
    {{ DiscussionBoard.errors[8189351].message }}
  • Profile picture of the author SashaLee
    Hi there,

    No need to shout.

    This is the last place anyone should seek or attempt to provide legal advice. It's obvious midasman that you sometimes provide good advice and sometimes you talk out of your backside. The latter is what you're doing here.

    Banks will not comply with someone just walking in and presenting a document. The process is called a garnishment and is applicable only after you have a court order.

    Talk to a lawyer. Not a forum.

    All the best,

    Sasha,.
    {{ DiscussionBoard.errors[8191589].message }}

Trending Topics