Q. I was just hired to do a very big product design project from a new corporate client. My problem is I need to hire some high level help, but I don’t want the responsibility of providing employee benefits and everything else that goes along with managing full-time employees. So how do I get the help I need without jeopardizing my relationship with my new client?
A. Is it possible for business owners like you to “have your cake and eat it too?” My answer is yes, provided you avoid a few potentially embarrassing and costly gotchas!
From a business management standpoint, I do like your thinking. Hiring experienced consultants and independent contractors is a great solution for companies that are growing quickly or changing their core line up of products or services. What you need today, may not be in demand next year. Also, when a project is complete, it’s emotionally easier to cut a consultant loose than dismiss an employee.
But hiring independent contributors is not without risk to you and to your customer. High on my list of devastating gotchas is the nature of who owns the rights to developed innovations. Without written agreements with your sub-contractors which expressly assign inventions and work to a company, the contractor may claim ownership to patentable technologies (which can include design patents) and other intellectual property. Yes, this can happen even if your company pays the consultant’s bill. Yikes!
Here are five recommendations to help you hire the best, with the least amount of time-consuming angst:
Interview three. The best way to hire the best talent is to interview at least three professional service providers, consultants or independent contractors. Trust me; you will learn more about what differentiates good performance from bad performance through comparative interviews.
Better consultants don’t “sell” their services. Rather, they provide prospective clients with an education about expertise. During the interviews be sure to ask about previous work assignments that most directly relate to your current needs. Call references too.
Hire local. Given the importance of this new customer relationship, favor local or regional service providers so you can meet frequently to monitor progress and collaborate in a productive way. This is not the time to test virtual service providers unless the work is highly specialized.
I would also be wary of hiring contractors through the spate of emerging online companies that negotiate work deliverables and fees on behalf of freelancers and independent contractors. Again, you have too much at stake with this new client relationship to add another layer of accountability risk. These services may also select the lowest bid contractor for the work assignment to maximize their profits, rather than employ the best qualified, most reliable talent.
Establish clear performance objectives. If you are wishy-washy about your expectations, then you can expect wishy-washy results. Define the work objective in writing. Set deadlines and schedule frequent opportunities for your contractor to ask questions. Encourage your contractor to present brewing problems to you long before the work is due.
Beware of a cash crunch. Try to match the timing of payments from your new customer to the timing of payments to your selected contractor. You shouldn’t have to take out a short-term, high interest cash advance to pay your contractor while you wait for your customer to pay your bill.
Keep the work offsite. The IRS is on the hunt for business owners just like you who want to hire independent contractors to reduce payroll tax and benefit obligations. This is legal, provided that the IRS can’t establish that your working relationship with the contractor really is a cover-up for a traditional employer-employee relationship.
One important test to demonstrate contractor independence is the location where the contractor’s work is created or performed. It’s ok for independent contractors to attend meetings at your offices, but not ok to perform the work on your premises and use your equipment.
I’ve posted a list of other factors that the IRS uses to over-rule independent contractor status at Start On Purpose.
I find that small company business owners often trust too much when they are really busy. When working with a new contractor, the best approach is to let them earn your trust. This means separating the contractor from your customer, performing mission critical work yourself, and having a backup plan if the contractor is unable to complete the work on time or within budget.
Susan Schreter is a veteran of the venture finance community and entrepreneurship educator. Send Susan your questions at StartonPurposewithFox@gmail.com.
Special Bonus: During July and August, entrepreneurs whose letters are selected for column coverage will receive a copy of Susan’s book, Start On Purpose which provides specific action steps to start a new business, attract investors, and make any new business idea bigger, better and more lucrative.