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Freelancers to the rescue: Part 2

(Editor's note: This is the second of two parts. Read Part 1.)

Whether you hire freelancers directly or go through an agency or consulting group may initially depend on the person you’ve identified and how they work. You may want to change that arrangement after considering the following.

Cost – Rates vary considerably. Agencies regularly mark up the hourly rate of a worker by 100%. This means if you’re paying $50 an hour, the worker is only getting $25. When comparing rates, ask what an agency worker will actually be paid, and expect to pay a direct freelancer more than that amount to cover their operating costs, including taxes and insurance. But don’t try to hire around the agency. Note that a consulting group will usually pay the consultant a salary so probably will not tell you what the individual is paid. The typical array of rates from low to high is direct hire – agency temp – consulting group, but this varies by the type of work.

Liability – If your freelancer will be working on your premises, your worker compensation carrier will want you to make sure that they are covered by their own worker compensation insurance. If they are injured on your premises and do not have worker comp coverage, by law, your plan must cover them. Depending upon the type of service they are delivering, whether remotely or onsite, other insurance, for example commercial, vehicle or professional liability, may be recommended by your risk manager or insurance agent. Individuals do not always have this insurance and may balk at getting it to work for you. Agencies and consulting groups should have it, but you should verify that they do.

Tax – Someone will need to pay payroll taxes for the freelancer. If you aren’t planning on it, make sure you have a contract with the individual that clearly states they are an independent contractor and not an employee, and assigns payroll tax liability to the freelancer.  Be aware that even with that documentation, your arrangement may be invalidated by the IRS or the State. Their analysis is multi-pronged, but the more the person acts and looks like an employee, not a company which runs a service business, the more the tax authorities are going to expect you to be paying payroll taxes on them – and you could end up with liability for other employee benefits. Agencies and consulting groups should be paying the payroll taxes for the individuals they provide you, but make sure that’s covered in your agency/consulting contract. Beware that sometimes small consulting groups hire contractors themselves and don’t cover either their payroll taxes or insurance. You don’t want to take on that liability.

Placement Fees – Agencies can take some of the headaches out of hiring a freelancer, but they may have strings attached. They may charge a placement fee if you try to hire the individual directly, either as an employee or a contractor. The best time to negotiate those fees is at the beginning of an engagement, not when you decide it’s time to hire. If you are asking an agency to hire a particular person you identify for them, you should be able to get the agency to wave any placement fees.

Recruiting – An agency or consulting group should only send you people who meet the specific job requirements that you need. Candidates’ backgrounds should be prescreened and verified by the agency to save you that step. You should get some service for that markup!

Backup and Depth – If you have a project that needs several extra people or need to make sure that your freelancer is never ever sick or on vacation, an agency or consulting group should be able to provide you with the extra staffing to handle those situations. Some freelancers coordinate with each other to back each other up or help with overflow, but you may then need to contract with those extra people separately.

Whether using an agency or contracting with a freelancer directly, make sure you have a contract. It will protect both of you. Besides including specific language to keep you out of hot water with the IRS and your insurance carrier, a contract should also clarify the business terms of your arrangement. Key terms include start and stop dates, interim deadlines, service description, fees and expenses, tax liability, billing and payment terms, ownership of work product, confidentiality and insurance.  Have a template ready to use and give your employees the weekend off!

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Cindy Wolf

 Cindy Wolf is a Colorado lawyer with more than 25 years experience representing large and small domestic and multinational companies. Her expertise is in corporate law and commercial contracting, with an emphasis on international issues, technology licensing and the Internet. She can be reached at cindy@cindywolf.com  or visit her blog at www.cindywolf.com

This publication is provided for informational purposes only. It does not constitute legal advice. There is no implicit guarantee that this information is correct, complete, or up to date. This publication is not intended to and does not create an attorney-client relationship between you and the author.

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