Team Building Done Right (Part 1): Free Labor, Independent Contractors, and Employee

Elena Volkova, Esq. on January 7, 2016

Recently, I’ve been asked to talk about the right and the wrong way to build a team, from a legal point of view.

Here is a quick rule of thumb for you:

When we hire people, we have to pay them.

(Okay, there IS such a thing as free labor. But it’s a tricky beast, as you’ll discover in just a moment.)

For today’s purposes, we’ll look at:

  • Free Labor
  • Business-To-Business (Independent Contractors)
  • Employees

Free Labor

The short answer?

Never a good idea.

People are often surprised to hear this because there are so many stories of relatives and friends helping each other out with their start-ups, without getting paid.

Nothing good ever comes out of that. At best, the start-up fails and everyone walks away with an, “Oh, well. It didn’t work out” feeling.

At worst, the start-up starts making money, and the friends and relatives feel that they should be paid for all the work they’ve done to get the start-up off the ground.

There’s always a misunderstanding on what happens if the business starts making money.

Do we share profits?
When? How? How much?
Or do you pay me back in lump sum?

You can’t assume that people want to work for you for free. Even if you put it in writing, that still might not be enforceable.

There are only 2 ways someone can work for you for free:

1. If your organization is a not-for-profit corporation and they’re volunteering to advance the mission of the not-for-profit.

2. If they’re student interns getting an academic credit from the college or university they attend (and there are strict rules around how to comply with the internship or regulations).

The regulations related to these 2 categories are fairly restrictive, so most small businesses are better off staying away from these relationships.

If you’re not familiar or comfortable with the process, then be aware, be careful and get professional legal advice.

Business-To-Business (Independent Contractor)

The easiest way to build a team is to sub-contract with another business to do the work that needs to be done.

The safest way to do it is by having a well-drafted independent contractor agreement (or work-for-hire agreement, depending on which side you are on).

Business-to-business (b2b) transactions are driven by contracts, and in our country the freedom to contract is a well-protected right.

The courts bend over backwards to accommodate business interests, as long as they don’t run against public policy or are based on fraud. (The assumption is that business owners have sufficient acumen and sophistication to fend for themselves, unlike consumers and employees.)

So, what do you need to look for in a b2b contract to make sure it doesn’t expose you to fines, penalties or litigation?

You must make sure that you’re dealing with a real business.

Okay, so what is a real business?

More than one person is good.

But if it’s just one person, then you want to make sure they…

  • have their own website and business card
  • (preferably) are incorporated
  • spend time marketing and doing business development
  • have more than 2-3 clients (not part-time jobs)

A real business usually has a particular expertise, so they are independent of you. And even when they do work for you, they exercise their own judgment on how to accomplish the desired results. You don’t have to supervise or train them.

(As always, I am over-simplifying things for the purposes of this article. For a more detailed discussion on what constitutes a business for accounting purposes, please view FASB’s guidance here.)

Employees

I personally have an aversion to this one, because when I had employees, the regulatory burden was too much for our small business.

I used to get at least one letter a week – from the IRS, or from the NY or US departments of labor, or from the unemployment insurance board, or from the workers compensation board.

There was always something. And I even had a payroll company dealing with that stuff!

It does not have to be painful, as I now understand.

Some business owners swear by their payroll companies, and swear that having employees was the best decision they’ve ever made.

That’s great – if you can make it work.

My advice is to have a thorough consultation with a business or employment attorney to make sure you understand how to comply with employer regulations.

This comes with an employee handbook, posters, unemployment insurance, workers’ compensation insurance, paid time off. The list goes on and on, and there is no cutting corners, because controlling shareholders remain personally on the hook for most employment-related issues.

Once you have a solid grasp on your legal obligations as an employer, a good payroll company will help you calculate vacation time. They will help you onboard the employees, set up direct deposit and provide all the notices that are required under the law.

Stay Tuned…

In the next part of these series, I’ll talk about accidental employees and the dangers they create for a small business owner.

This material may be viewed as attorney advertising and does not constitute legal advice. This information does not create an attorney-client relationship between you and the author. This article strictly represents the personal views of the author on the date it was written and such views are subject to change without notice.

Share Button