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Effective Employment Contracts and Questions of Independent Contractor Relationships

Effective employment contracts are one of the anchors of a successful and profitable business here in San Diego.  What are a few effective strategies to include in an employment agreement, and what is the latest update on independent contractor relationships?

Effective employment contracts should clearly identify the scope of work to be accomplished under the agreement, the compensation for work to be accomplished, incentives and benefits to be provided by the employer, reference to internal HR and employment policies and procedures, as well as plans for correcting poor performance and termination.

Just as an effective business contract moves the parties smoothly through a transaction, and employment agreement should move the employee to perform with excellence and contribute to the profitability and success of the company.  It may not be possible to deploy a lock tight non-compete agreement, but there are strategies to protect key corporate information such as supplier lists, customer lists, marketing strategies, and unique processes to prevent this information from being used by the employee against the company in the future.

One important concept is to reward exceptional performance with increased financial incentive.  Almost every job in your company can be tied to performance metrics of one form or another.  Monetize the fulfillment of these metrics, and provide additional compensation for exceeding performance metrics.  Performance often follows compensation.  An effective employment agreement should incentivize excellent performance and reward it when it occurs.

A word of caution on independent contractor relationships.  Recent IRS audits and California State Tax audits have focused on the relationship of independent contractors to the companies for whom they perform work.  It is no longer about the amount of control you exert, or the tools or technology you provide to accomplish the work.

A landmark US Supreme Court ruling changed the balance of the equation to reflect not only the employment relationship (control, direction, etc.) but the financial relationship.  In essence, the principle question a revenue officer will want answered is what percentage of that “independent contractor’s” income is derived from working for your company?  If your business represents the majority of their income, you have a substantial and serious contingent liability on the books.

The IRS and the State of California want to re-classify as many independent contractors as possible to a status of “employee.”  This will result in substantial payments by your company, and could threaten the viability of your business model itself.  Protect yourself and your company.  Call the experienced business attorneys at Allen Barron for a complimentary and substantial consultation at 866-631-3470 today.