The relationship created between your business and the people helping it will be governed by some tricky rules. There are basically 3 types of relationships you create when an individual provides services: (1) employment; (2) independent contractor; and (3) partnership/joint venture.
An individual is an employee if you control the manner, means and end result of their work for you.
In the United States, employment is “at will” by default – it has no guaranteed duration and can be terminated by the employer or the employee at a moment’s notice. However, there are exceptions to “at will” employment: any employment contract (written or oral), a union contract, wrongful or retaliatory discharge, a civil rights laws violation and laws that require notice during mass layoffs and mergers, like the Worker Adjustment and Retraining Notification Act of 1988 (a/k/a “WARN Act”).
Workers who are not employees are “independent contractors.”
2. INDEPENDENT CONTRACTOR
An individual is your independent contractor if you have the right to control or direct the end result of the person’s efforts, but not the efforts themselves. Whether someone is an employee or independent contractor is a surprisingly knotty question, with different rules for tax and employment law.
A worker is an independent contractor if the worker controls the way in which she does the job, is free to come and go as she pleases, provides some or all of her own equipment and provides similar services for other businesses. There is actually a twenty-point test to determine whether an individual is an independent contractor or an employee. Be aware: just because you say someone is an independent contractor does not mean that the IRS or a court is going to agree.
3. PARTNERSHIP OR JOINT VENTURES
There are rare occasions when you form a partnership with a service provider. A service relationship may convert to partnership when there is agreement that the provider will share the risks and rewards of the business, will have some control over their own performance and also over the business operations.
WHY DOES THIS MATTER?
Your worker’s legal relationship to your business has consequences. Here are just a few, though not all of the consequences.
If the worker is an employee, then you have obligations to withhold part of her compensation for FICA (Social Security and Medicare); income tax, FUTA (federal unemployment insurance) and other deductions under state law. If she is an employee, you also have exposure to a fuller panel of antidiscrimination laws – if the worker is an independent contractor, you have more defenses, though that may not lessen your liability – it just makes the picture more cloudy.
Depending on your state’s laws, you may not be required to provide workers compensation insurance for independent contractors (to the great disadvantage of the contractor).
There are also huge consequences in copyright. If your worker is an employee, than everything she makes for you belongs to you. But, if your worker is an independent contractor, then by default everything she makes for you belongs to her UNLESS the work is intended to be a “work made for hire” type of work and you and she agree in writing that the work is intended to be “made for hire.” Even safer, just get her to assign, in writing, the work and the copyrights to the work, to you.