The pros and cons of hiring independent contractors for your firm
I started One 8 Solutions 20 years ago as an IT service company, and then morphed it into a client accounting service firm about 10 years ago.
One of the reasons I made the change from IT to accounting service is that I needed to scale to a business model that allowed for people doing production to work for me. Also, I found IT Services nebulous because you could spend hours trying to fix a computer, and I had a tough time justifying the invoice to clients, when it could be less costly for them to buy a new computer. While I like solving puzzles, there are just too many pieces to fit together when it comes to IT. So, I went for a different puzzle to solve for clients – accounting and bookkeeping.
Once I made the transition, one of the first things I needed to better understand was how to build my firm by hiring independent contractors. When it came to hiring outside expertise, I needed to know what I didn’t know. I asked for council from my brother, an employment law attorney who typically represents the employer. He said that I should be aware of the following potential risks:
- Workers’ compensation
- Overtime regulations
- Government oversight (i.e., Does the IRS or the state consider them an employee? That is the makings of another article.)
My way around it was to request the following from my contractors, so it would appear that they have their own business, which they actually did.
My next steps:
- Open a business bank account
- Get their own workers’ comp – it doesn’t cost a lot, but they couldn’t make claims for themselves if they wanted to; only their employees can.
- Register the business name with their municipality.
- Let them make their own schedule, though I did prefer that they be available during business hours.
- Let me know when they will not be available.
One of the things I liked about having contractors is that if the quality of the work was questionable or just plain incompetent, I had recourse. I didn’t have to pay them. Note to employees: You must pay for all services performed – whether they are good, bad, or terrible. You can terminate for cause, but you must pay for work completed.
I was content with this business model until I had my first scare. A contractor disappeared with my client’s record and statements. The person ghosted me, so I had to show up at her front door and demand the records back. After that incident, I reached out to my insurance agent to find out if my Errors and Omissions (E&O) insurance covered this risk. And that was my introduction to cyber insurance.
I added cyber insurance for a few years, which seemed to suffice. But over the past couple of years, “risk” started to increase dramatically, including:
- Social engineering
- Business continuity
- Quality control
- Timeliness of work being done
Cyber risk started becoming a focal point for me. So much so that I wanted to share my concerns with others.
As a result, I put together a Risk Panel Discussion event with some of my networking partners, right before COVID lockdown in 2020. Coinciding with this were several discussions in many of my QuickBooks ProAdvisor® peer groups regarding best practices for managing independent contractors. It became apparent to me that it was time to make the switch from independent contractors to employees.
By transitioning from contractors to employees, I reduced my risk as a business owner by not having to worry whether the government considered them employees, which involved a myriad of rules and regulations.
There were several other benefits as well, including the following:
- My staff no longer had to carry insurance and verify with me annually, as my E&O Cybersecurity insurance extended to them.
- I now provide my employees with a dedicated laptop that is to my specifications, including security controls to prevent loss of data, should something happen.
- Their computers are not limited to their budget, allowing me to have more consistency and quality control on One 8 Solutions’ technology.
To summarize, here are some best practices for both contractors and employees:
- Do your research on your people, test their knowledge, and test again.
- Make sure they have at least a QuickBooks® Online Certification.
- Draft an agreement specifying:
- Details of what constitutes a bookkeeping activity vs. an accounting level – especially if you compensate for more difficult tasks
- Pay rates
- Timeliness of payment
- Added Incentives
- Best practices for how to communicate with team, clients, vendors, and associates (more on this further down)
- All the other legal jargon we tend to dislike
- Give them your company email – having email sent to their own email potentially violates almost all NDAs with the client and represents a big security hole.
- Provide them with a company phone line that has texting and digital meeting capabilities. I use Zoom, but there are several cost-effective options out there. Neither your employee nor contractor should give out their own number for business-related activities
- Buy a computer that’s to your specifications and only used for work. Make sure it can be remotely wiped, if something should happen to it. Encrypt the hard disk. In Massachusetts, any laptop that has confidential info must be encrypted. Be sure to check your state guidelines.
- I highly recommend you have a work management solution where you can track the progress of work being done, such as daily and weekly month-end close tasks.
- Train, train, train.
- Set a standard of how work is done, and offer regular training sessions, as needed.
The biggest pro of having independent contractors is having recourse if the work is shoddy, as well as not having to pay payroll taxes. Since I’ve made the change to employees, the benefits are so numerous that I will no longer use a contractor for accounting or bookkeeping services. In addition, I’m at the point where I’m also considering changing our legacy contractors to employees this year.