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Thomas Aiken (left) of DGK Group says his firm is a tax consultant to Michael Levinson’s firm, TechWise Group. TechWise Group provides IT support and consulting to DGK.

Independent contractors
may be the way to go

In today’s economy, many companies are turning to independent contractors.

Firms and skilled workers have many issues to consider when deciding if taking this route is the right alternative to part-time, full-time or temporary employment.

Money and manpower were limited when NuPathe, a specialty pharmaceutical company, based in Conshohocken, Pa., opened its doors in 2005. “There was only a handful of us,” recalls Suzanne Hanlon, Vice President. “We didn’t need and couldn’t afford a full-time CFO, so we hired a consultant.”

The independent contractor visited the company one day a week. The rest of the time, he worked remotely or came in as needed. “He had other clients for whom he’d do the same thing,” says Hanlon, who is also General Counsel for NuPathe.

Although NuPathe now has a full-time CFO, the company continues to outsource certain tasks involving quality assurance, such as vendor audits, and preparation of marketing and product packaging materials. “We don’t need someone full-time to do certain jobs,” Hanlon says, “and hiring contractors works well in those situations.”

Consultant Amy Chandler-Skerkis helps NuPathe Vice President Suzanne Hanlon.

NuPathe is in good company. oDesk — an online marketplace that connects companies and contractors — surveyed 600 companies and found that 41.9 percent planned to outsource more in the near future. The reasons varied. Some had cut full-time staff (7%) and some were unable to hire full-time staff (34.9%). Up to 14.6% said they had replaced employees with contractors in the last year. Another 14.5% had hired as a contractor a person who was out of work and would otherwise have been unemployed.

“There is so much value in bringing in professionals with so much experience under their belts,” says Phyllis Hart, owner of 3 Sisters Productions, a special event firm in Haverford, Pa. Hiring a full-time employee with the same level of experience as the contractor is often cost-prohibitive, she adds.

To get the most out of the arrangement, contractors should offer a service or expertise that the company does not already possess. Otherwise, the contractor is “just additional bandwidth,” says Rightley McConnell, Project Manager for Precision Systems in Horsham, Pa., a systems and software engineering house that also offers consulting services.

Contractors can also offer a fresh perspective, says Walter P. Johnson, President of Precision Systems. “Contractors are not involved with the office politics. They’re more interested in solving a problem,” says Johnson.

While the advantages are evident, hiring outside contractors requires some caution. The IRS has strict guidelines regarding the independent contractor relationship. Other issues to consider: intellectual property and ownership rights to products or ideas.

Independent contractor vs. employee

In general, independent contractors:

• Have a valid business license and, if required by law or by a client, the proper business insurance
• Handle their own taxes and Social Security payments
• Set their own hours
• Furnish the tools for the job
• Have their own place of business, which might be a home office
• Have other clients or are actively seeking other clients
• Are paid on a per-job, hourly or commission basis
• Enter into an agreement stating they're not employees if paid on commission
• Submit invoices
• Receive a 1099 stating income earned for services rendered

At NuPathe, Hanlon determines whether a task should be handled by a temporary employee or a contractor. The company recently needed a clinical research associate for a few months at the end of a study. The ideal candidate had recently lost her job. However, she did not have her own business or any other clients. NuPathe opted to make her a temporary employee.

Companies can tell an employee what to wear, how to behave and how to complete a task. That is not the case with independent contractors. “In the consulting contract, you set out what you need them to do, but you can’t control how they do it,” Hanlon says.

Precision Systems’ CEO Susan Johnson and President Walter Johnson meet with Beinstein Associates, Inc.’s lead consultant, Willard Beinstein.

(Some clients, apparently, did not receive that message. “Some are so hands-on that they keep dictating and you become the ‘doer,’” Hart says. “In that case, it’s good not to have an ego.”)

Independence can have its drawbacks. Contractors might be engaged with other clients when you need them. They might take a month off. Depending on your agreement, contractors might leave a project unfinished if they accept a full-time job with another company.

Covering the bases

You may also experience problems if you fail to protect your intellectual property and ownership rights.

“It’s important to make sure both are clearly set forth in the agreement so you don’t run into problems,” says Cindy Elliott, an attorney at Blank Rome LLP in Philadelphia whose practice covers intellectual property law. “Sometimes, people assume because they hired someone — and they’re paying them — that they own what’s created. That is not necessarily true. Generally, if a contractor has built up an area of expertise, they’ll want to retain some ownership rights to what they’re creating.”

Non-compete arrangements are not unusual. But they should not restrict a person’s ability to earn a living, Elliott says. They’re usually limited to a finite period and/or geographic area. She also recommends stating nondisclosure and confidentiality terms in an agreement.

Companies using contractors should protect themselves in other respects. Hart is surprised at the number of companies who neglect to send her 1099 forms at the end of the year. She reports the income regardless. She demands certificates of insurance from all the contractors she uses to produce an event, but some companies do not. Big mistake, McConnell says.

“If they aren’t licensed and they don’t have the proper insurance, you don’t want them onsite,” he maintains. Precision Systems in the past has even been asked to produce a bond.

Companies that find safety in numbers may prefer to use services like Precision Systems, whose employees serve as consultants. Likewise, DGK Group P.C. in Plymouth Meeting, Pa., provides financial management outsourcing. DGK Group, for the most part, uses employees to assist clients, says Thomas W. Aiken, Principal of the firm. But if a unique expertise or skill is required, the company will hire qualified subcontractors to meet the needs of the client.

“Usually there is more than one person, including a partner of the firm, who understands the project’s milestones and what’s being achieved,” Aiken says. “An individual, on the other hand, could leave you with an unfinished project, resulting in added cost and/or difficulty in picking up where they left off.”

Finding a contractor

Despite the growth of online sites like oDesk, NuPathe finds many of its contractors through networking or past experience. “Many people in our company have been in the industry for many years,” Hanlon says. “We often rely on consultants we used in prior jobs.”

One of NuPathe’s quality assurance consultants is a former employee who left to start her own business. “We liked her, so we have a consulting contract with her. She works with us on a project basis and has other clients for whom she does the same thing,” Hanlon says.

Like hiring an employee, hiring a contractor requires due diligence, she adds. “There are people out there who hold themselves up as consultants, but they may not be qualified or they are inaccessible,” she says. “Do your homework.”