Owner Operators - The Grapevine
How Independent Contractor Agreements Can Protect Your Small Trucking Business
Consider the sad story of Bob Jones. Bob runs a small local trucking company. Bob gets a new warehouse client that requires a dedicated driver to service that account. Bob hires John who has his own tractor and trailer to service that account. Bob thought he was paying John by the truckload and John thought he was getting paid by the pallet.
You can imagine what happened. John finished the work and submitted a bill of $5000. Bob refused to pay, so John sued him in small claims court. Without a written agreement, the judge had to rely solely on their testimony. Apparently, John was more convincing and was awarded the full amount.
A well-written Independent Contractor Agreement would have eliminated all this unpleasantness. In fact, Bob probably would not have had to pay John anything if they had had a written agreement in place. Good independent contractor agreements serve two purposes: They help small businesses avoid costly misunderstandings and legal disputes, and they can prevent problems with the IRS and other government agencies by making it clear that the persons you are hiring are independent contractors, not full-time employees. As a small businessperson, how do you protect yourself with the right kind of agreement?
What You Need To Know
Legally speaking, you do not have to use a written agreement when you use independent contractors. An oral agreement is legally enforceable and, for very small jobs, it may work quite well. But for anything else, it is a good idea to have a written agreement in place.
Big Brother Is Watching You
The IRS and your state unemployment and workers' compensation agencies assume you have a written agreement with all the workers you have classified as independent contractors. If you are audited, they are going to want to see those agreements, and they will compare what is in writing to your actual operations. Written agreements with independent contractors have become a routine fact of business life.
Employees Vs. Independent Contractors
What are government officials looking for? They are checking to be sure your independents are really independents. The basic criteria: Genuine independent contractors follow their own trade, business or profession (i.e., they are in business for themselves). Independent contractors typically offer their services to the general public, not just one person or company. They often have their own business offices. They invest in tools, equipment and facilities; and they take care of their own taxes. If the business goes well they can make a profit, but if it goes badly they risk going broke. All in all, the criteria used by the government to determine employment status are rather involved. However, the IRS has developed a checklist for guidelines, which we will cover at the end.
Before you draft an agreement, it is important to understand the terms that should be defined in any independent contractor agreement. Including these provisions in your agreement will help protect you in the event of an audit and they can also keep your relationships with your independents running smoothly. In the trucking industry there are also certain general leasing and written lease requirements that have to be met.
Watch Your Mouth
A simple thing like what you call the independent contractors you hire can have a big impact. If you give your agreement a title, call it an Independent Contractor Agreement. Do not call it an Employment Agreement.
Scope of Services
In as much detail as possible, the agreement should describe what the independent contractor is expected to do. You must word the description carefully to concentrate on the results the independent contractor is expected to achieve. Do not tell the independent contractor how to achieve the results--that would indicate you have the right to control how he/she performs the work.
Term Of Agreement
The term or duration of the agreement should be as short as possible. Six months is a good outside limit, but I have seen it go as far as a year. Anything longer can make the document look like a full-time agreement. If the work is not finished after the term of the agreement, you can always renegotiate the terms and sign a new agreement.
Generally, it is better to specify a fixed fee or a percentage for the job, rather than payment by the unit of time. Sure, setting a fixed sum could mean you will pay the contractor too much or too little if the job takes more or less time than expected. But paying a contractor a fixed sum for the job strongly supports a finding of independent contractor status in the event of an audit. Someone who takes on the risks associated with flat-fee payment is more likely to be an independent contractor. Paying a worker by the hour or other unit of time often indicates that the worker is an employee, because the worker assumes no real risk of loss. Also in the trucking industry, there is a time element that also needs to be addressed.
Revisions and Acceptance
When the independent contractor delivers the work product it is up to you to decide whether it is good enough or whether or not it satisfies the contract's Scope of Services clause. You may want to specify in your agreement exactly what documentation needs to be submitted for payment.
To make it clear that revisions may be required from time to time, your agreement can just say, "Contractor will make all necessary revisions required by client." You do not have to pay the contractor for revising unsatisfactory work. But if changes are needed because you changed your mind about the scope or nature of the project, you should pay the contractor for the extra time involved.
Until next month, "Drive Safe! Drive Smart!"