If you work as an IT freelancer or independent contractor, you’ve probably found that businesses like to work with you because you make the things simpler for them. Your client doesn't have to worry about paying your taxes or doing extra paperwork. That's great for your client, but in reality that means that more liabilities are shifted on to you.
In order to protect their business, reduce their risks, and protect their health and safety, freelancers need to know their state's legal definitions for "independent contractor" and relevant Workers' Comp Laws.
State Laws and Pinning down the Definition of Independent Contractor
The first thing freelancers and ICs need to know is that state law determines who qualifies as an independent contractor. You might be thinking: wait a minute, I signed a contract that said I was an IC. Doesn't my contract determine this? Contrary to popular belief, your contract doesn't necessarily determine your employment status.
Here's the deal. You can be hired as an "independent contractor," when in reality the business treats you as a regular employee. In these situations, state laws usually protect IT contractors and help them get benefits (such as overtime pay, when appropriate).
In fact, years ago Microsoft was sued in a massive class action lawsuit over the legal status of some of its contract workers. The case is now famous, as it helped to define the rights of IT contractors. Microsoft lost the suit and had to pay its contractors overtime wages and benefits.
So how does your state define an "independent contractor?" Well, it turns out the definition is a little murky. Regardless of your contract, the state can declare you a common law employee if your meet some of these criteria…
- The client directs and supervises your work closely, rather than letting you work on your own like a contractor.
- The client restricts you from pursuing other employment opportunities while you're under contract.
- The client supplies you with tools, training, oversight, and benefits they would normally give to employees.
In a lawsuit, a court uses these criteria, but ultimately makes a judgment call regarding the nature of the work done by the contractor. You might not meet all the criteria, but if you're close, a judge might rule in your favor and consider you an employee.
In other words, your employment status is not a cut-and-dry issue. For this reason, some states (such as Vermont) are pushing to set up online portals for ICs to log on and verify their IC status. This makes it easier for you to be hired because your client will know that you don't come with additional liability.
Got all that? It can be a bit overwhelming. The ambiguity in contractor laws and specific state regulations can make worker classification confusing. Being a freelancer should be easy. But in reality, it's usually easier for the client and harder for the contractor.
(To read more about the increasing demand for IT contractors, read "Obama: Freelancers Are the Future in Tech and Elsewhere").
Know your State Workers' Comp Laws and Protect Your Freelancing Business
So what does an IT contractor do to manage risks that full-time employees don’t have to think about? Most likely, your client won't cover your Workers' Compensation liabilities. But you might not have to purchase this insurance, either.
If you're a one-man operation, you probably don't need to have Workers' Compensation Insurance. But if you employ other developers or IT administrators, you probably will have to cover them (unless they are independent contractors as well).
When you sign a contract with your employer, some states will require that you verify your IC status, which often simply means submitting your Employee Identification Number (or your Social Security Number if you work primarily as a freelancer). If you have employees, you might also have to submit an insurance certificate that proves they are covered under a Workers' Compensation policy.
If you need insurance coverage and a Certificate of Liability Insurance in order to sign a contract, our agents can usually get you covered in a matter of hours. To learn more, check out these free cost estimates for small business insurance.