Independent Contractor Procedures: What Happens Once a Worker is Classified?
What happens once a worker is classified as an independent contractor? For the contracting business (the one seeking services from the independent contractor), there are some key records that should be obtained, some filing requirements to be aware of, and certain policies/procedures that the independent contractor should be given.
Just as with other worker or business relationships, there are certain records that should be kept to detail the parameters of an independent contractor relationship. These include all documents related to the scope of work and the basic business information for the independent contractor.
Though not an exhaustive list as different businesses/industries may require additional documentation, here’s a basic list of records to obtain:
Independent contractor analysis showing that the worker meets all three prongs of the ABC test or all the conditions of an exemption, plus the Borello factors[i]
Signed agreement laying out payment terms/fee schedule and scope of work
Copy of the independent contractor’s W-9
Copy of the independent contractor’s workers compensation coverage
Proof of compliant sexual harassment and abusive conduct prevention training
Type of business entity the independent contractor uses
In addition to any records that need to be collected, businesses should create a filing system and records retention policy that (a) maintains confidentiality of these business records and (b) determines how long these records must be kept.
If the independent contractor is paid $600 or more, then certain forms are required to be completed.
IRS Form 1099-NEC (Non-Employee Compensation Form) must be filled out and a copy given to the independent contractor.[ii]
For California, any time a contract is entered into for $600 or more or a payment is made for $600 or more (whichever is earlier), then the service-recipient hiring the independent contractor must submit the Report of Independent Contractor(s) Form (DE 542) to the EDD.[iii]
This form is only required if the independent contractor is an individual or sole proprietor.
The DE 542 form has to be filled out using someone’s social security number (“SSN”); if a sole proprietor has set up a federal employer identification number (“EIN”) for their business, it’s possible that the W-9 they send you will have an EIN rather than their SSN. Because this form is only required if the contractor is an individual or a sole proprietor, it’s very helpful to inquire about the independent contractor’s business type at the beginning of the relationship so it’s clear whether this form needs to be filed.
The filing/records retention policy mentioned above should also address how to accept and protect an independent contractor’s SSN, both in filling out the DE 542 (or other governmental form) and ensuring access to this information is limited to only those who absolutely need it.
In addition to the records that a business collects, the independent contractor should receive a packet of information pertaining to the contracting business’s policies and procedures that the worker is expected to follow. These policies can include the business’s harassment and discrimination policy/procedure, invoicing procedure, safety requirements while on-site, and any other important protocols that ensure safety and compliance with California labor law.
Making sure independent contractors receive and acknowledge receipt of these policies sets expectations for the contractual relationship upfront and allows everyone to be on the same page with those expectations.
Create a procedure for onboarding independent contractors
Review or create a records retention policy that addresses handling confidential information from independent contractors
Make sure the independent contractor is made aware of important business policies and procedures they are expected to follow
[i] EDD Employment Determination Guide: https://www.edd.ca.gov/pdf_pub_ctr/de38.pdf. [ii] https://www.irs.gov/forms-pubs/about-form-1099-nec. [iii] https://edd.ca.gov/Payroll_Taxes/Independent_Contractor_Reporting.htm.