When you’re a CEO with a team of one, it can feel exhausting being the visionary, marketing specialist, social media manager, content creator, client/customer service representative, brand ambassador, administrative assistant, systems and process developer, web and lead page builder, and bookkeeper. That is not even all the hats you wear in your business and let’s not get started on being a wife, mom, sister, daughter, and friend.
To ease the burden on yourself, you may look for help by growing your team to increase your revenue, reach, and reclaim your time. Growing your team with contractors can be a smart move if done correctly.
Skip these legal pitfalls when growing your team and hiring 1099 contractors:
Legal Pitfall #1: Misclassification
Calling someone a 1099 contractor does not necessarily make them one. Contractors are appealing to business owners because they pay their own taxes.
However, misclassifying a hire as a contractor when they are really a W-2 employee can land you in the hot seat with the IRS and federal and state Department of Labor.
Let me clear up some confusion I’ve seen my clients make:
A contractor is not a contractor just because the contract says so.
There are state and federal laws that apply to properly classifying a worker as contractor or employee for tax, administrative, and legal purposes.
How do you avoid misclassification?
Ask and Answer: How much control and freedom do they have to do the work?
The more control and freedom they have to operate like a business owner providing you a service, leans more toward 1099. The less control they have leans more towards W-2.
The IRS and individual states have their own tests to determine whether a worker is a 1099 or a W-2.
Think of a scale. As you place weights on either side it may balance or tip more in one direction compared to the other. These tests do the same thing. They look at several factors like the reality of the relationship to determine whether the behavior, type of relationship, and the financial nature between the worker and the boss tip more toward 1099 or W2.
There is no definitive yes or no analysis except when the person is doing exactly what your business does they are usually an employee (limited exceptions apply).
Find out what your state factors by researching worker classification for your state and check out the IRS factors.
Unfortunately, misclassification is identified after it has occurred and the cost may be too much for your business to survive.
Legal Pitfall #2: Bad Contract Language
Sometimes having a contract is NOT better than no contract. There is a language to contracts and language matters when it comes to legal.
I’ve seen clients attempt to hire a contractor but inadvertently create an employer-employee relationship through the contract.
Let me clear this up:
There is no such thing as a contractor employee or a contractor at-will.
If you’re hiring a contractor, employee should be nowhere near your contractor.
Language matters when it comes to the legal. They are either a contractor or an employee. When you use employee language in a contractor contract, you create confusion for the worker, the courts, and yourself.
This confusion has serious implications for taxes you might be required to pay or back pay, penalties for misclassification and not obtaining workers’ compensation (which is $10,000 in Maryland), and loss of intellectual property.
Legal Pitfall #3: Not Securing Your Intellectual Property
Employees = You own the IP they create
Contractors = They own it unless they transfer the rights or it is a work made for hire
I broke this down in another blog post, If You Want to Own It, Put A Contract On It. If you want to own the intellectual property created for your business by a contractor, you need a written contract that transfers ownership to you or your business. Without a written contract, you do not own what they create even though you paid for it.
Trust me, it is much harder to persuade a contractor to turnover intellectual property after the relationship has ended, especially if it ended badly.
Legal Pitfall #4: Failure to Collect Paperwork
If you’ve ever worked a job, then you’re familiar with the onboarding process of completing your paperwork on the first day of the new job. Did you know that is all legally required for employers to collect that paperwork, usually within the first three days?
Just like employees have required paperwork, contractors do too. Do not forget to collect a W-9. If you’re hiring another business, do a business entity search in the state database to confirm the business is registered and in good standing to do business.
The last thing you want is to find out too late or when you need to sue, that name on the
W-9 is wrong, the business is not registered, or you do not have the correct information to send 1099's come tax time.
Those are four legal pitfalls to skip when growing your team with contractors.
There are more, but I’ll leave you with this: if a contractor is creating IP for your business, prohibit the use of A.I. to avoid losing any copyright protection and copyright infringement.
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About the Author: Chayla C. Jackson, Esq. is a business attorney, legal protection strategist, and DIY legal coach. She empowers and equips women CEOs to have peace of mind and confidence as they protect their brand, build a legacy, and secure their wealth. Chayla is the managing attorney of Legacy Legal & Consulting Firm, a virtual law firm for CEOs on the go. She also trains and coaches Christian service-based CEOs how to DIY legal safely in her Legalproof Your Business Membership. With her Georgetown Law teaching background, Chayla empowers business owners and her clients to understand the law without getting lost in the legalese. Chayla has practiced law for over 9 years and earned her juris doctorate from Georgetown Law. She has been featured in the Baltimore Business Journal and CanvasRebel Magazine. Learn more at www.iamchaylajackson.com.
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