How to Avoid Misclassifying Contractors: Legal Checklist for Startups
In the fast-paced world of startups, engaging independent contractors can be an efficient way to scale. But get the classification wrong, and you risk wage-and-hour claims, tax penalties, and even unemployment insurance liabilities. This legal checklist walks founders through the key factors and best practices to ensure your contractors remain rightly classified—and your startup stays compliant.
1. Define the Nature of the Relationship
Why it matters: Courts and agencies look first at how work is structured in practice.
Checklist:
Draft a written agreement that clearly labels the worker as an “independent contractor.”
Specify scope of work, deliverables, and project timelines—not an open-ended assignment.
Require contractors to supply their own tools, equipment, and workspace whenever feasible.
2. Emphasize Control and Independence
Why it matters: The degree of direction you exercise is a critical test for “employee” status.
Checklist:
Avoid dictating daily schedules or micromanaging how tasks get done.
Let contractors determine their own method, hours, and location of work.
Permit them to delegate or subcontract portions of the project, subject to your client-confidentiality rules.
3. Limit Exclusivity and Dependence
Why it matters: True contractors can—and should—work for multiple clients.
Checklist:
Include language allowing the contractor to engage with other clients simultaneously.
Set reasonable minimum and maximum scope—don’t lock them into full-time dedication.
Avoid benefits or perks tied to exclusivity (healthcare stipends, PTO, etc.).
4. Tie Compensation to Project Results, Not Hours
Why it matters: Hourly pay and regular paydays resemble an employment relationship.
Checklist:
Structure fees as flat rates, milestone payments, or per-project deliverables.
Require the contractor to submit invoices rather than timesheets.
Refrain from imposing minimum hours or “on-call” obligations.
5. Establish a Clear Term and Termination Process
Why it matters: Open-ended engagements without clear end-dates look like employment.
Checklist:
Define a fixed term (e.g., “90 days” or “until delivery of X”).
Include a termination-for-convenience clause with short notice (e.g., 7–14 days).
Spell out post-termination obligations, such as return of materials or final invoicing.
6. Confirm Tax and Insurance Responsibilities
Why it matters: Employers who fail to withhold payroll taxes or secure workers’ comp can be penalized.
Checklist:
Require contractors to maintain their own health insurance, liability coverage, and—where applicable—workers’ compensation.
Include a tax indemnity clause: contractor affirms responsibility for all federal, state, and local taxes, and indemnifies your startup for any related claims.
Obtain a completed Form W-9 (U.S.) or local equivalent before issuing any payments.
7. Protect Your Intellectual Property and Confidential Information
Why it matters: Without clear IP assignments, you may not own what they create.
Checklist:
Include an IP assignment clause: all work product automatically transfers to your company.
Draft a robust confidentiality agreement covering trade secrets and proprietary data.
Spell out data-security requirements, especially if they handle customer or personal information.
8. Regularly Audit and Update Your Practices
Why it matters: Courts and regulators evolve their tests over time—and your standard agreement can grow stale.
Checklist:
Conduct an annual legal review of contractor agreements and practices.
Train your people managers on dos and don’ts around contractor oversight.
Monitor changes in state laws (e.g., California’s ABC test) and federal guidance from the Department of Labor.
Misclassifying contractors exposes your startup to significant financial and reputational risks. By following this checklist—defining clear boundaries, emphasizing independence, and documenting responsibilities—you’ll build a compliant, flexible workforce that scales with your vision.
Need help reviewing your contractor program? Contact our team at 786-461-1617 for a tailored audit of your agreements and classification practices.