“Gig economy”. This is a term that got popular when Covid – 19 had spread its tentacles throughout the world. The gig economy refers to a labour market where occupations are not permanent like employees but rather independent contractor, freelance, and transitory. People in the gig economy make money by working, offering services, or producing commodities as they are required. 

But you know what? Businesses began to find this convenient. If you could hire independent contractors people in your surge times and do away with them when you didn’t need that much workforce, why would you hire employees on a fixed salary for a long term?

Given that the labour market extended beyond the territorial boundaries of countries, most companies began to hire independent contractors, because they didn’t want to become employers and become subject to stringent employment laws of other countries. The workforce composition changed from being employee heavy to being contractor heavy.

But while this may give you an advantage in terms of getting very good talent at a low cost, there are a few things you must be very careful about while hiring an independent contractor. We have seen that quite a few clients were so tempted to hire fast and get a lot of work executed by independent contractors, that they didn’t think about these – and suffered.

Here are five critical things you must consider before you go on to hire that talented independent contractor:

• Intellectual property

Unless you are hiring an independent contractor purely for certain execution tasks which are repetitive, you will inevitably end up sharing some intellectual property with them. Some designs, some plans, some codes, some content, some customer lists – and a lot of other things. You have to ensure that you think of what will happen if they start using your IP for purposes you don’t agree with. Like selling it to your competitors? Start a business using your IP?

What should you do then in case the independent contractors start to use your IP for their personal gain?

For starters, the best action is preventive. Never share the entire thing with a single independent contractor. Or a bunch of them in the same place. If you have a software that needs ABCD to be put together, get an independent  contractor in India to do A, a Filipino contractor to do B, a Sri Lankan contractor to do C and maybe your employee or you to do D.

Another alternative is to have them work only on your systems or your environment. Expensive, but maybe the one time expense justifies the cost you can incur if they went off and sold your IP to someone else.

Last, but not the least, you must always have an agreement in place. If nothing else, it gives you a right to take action on the independent contractors legally in their countries. 

• Confidentiality

Confidentiality is closely linked with IP. You don’t want the independent contractors to share your business secrets with third parties. It is extremely important that they maintain the confidentiality of your business information. People referring to tasks they have done for “a client” without disclosing the identity is fine. People giving out the entire transaction with your name in it to others is not fine.

Here’s what you can do, to protect your confidentiality: First, any information must be shared only on a “need-to-know” basis. Second, always have a confidentiality or a non-disclosure agreement in place before you share information. If you have in place an independent contractor agreement which includes confidentiality, that is fine too.

• Avoid advance payments and always use milestone based payments

There is a colloquial Gujarati saying, which says that once you have given the money to someone for a task that is yet to be done, you kind of lose power in negotiation. In some cases, advance payments might be necessary, but in most cases, it is possible for you to make payments after the work is done. There are payment mechanisms which will enable you to place funds in an escrow account, just so the contractor gets the payment protection and you get to pay when the work is done. Use milestone based payments – not time-based payments, so that if the contractor loses steam while working, you don’t have to pay until the milestone is hit.

• Beware: your contractor can circumvent you to reach your customer directly!

Think things through before you delegate tasks enough to your independent contractor to enable them to reach your customer directly. If they can, they will. If you want to prevent this, ensure that they either do not have the full picture about the customer or that you have already built a solid relationship with the customer such that the customer is unlikely to stray. As with everything else, ensure that you have appropriate non-circumvention provisions in the independent contractors agreement. Ensure that you place a specific penalty in the agreement for circumvention. This will at least make them think twice, if not prevent them totally.

• Last but not the least, don’t create independent contractor agreements which mimic employment agreements!

Just by addressing a donkey as a horse, the donkey does not actually become a horse. Just by titling an agreement as an Independent Contractor Agreement, it does not become one. If it reads like an employment agreement, has the same restrictions as an employment agreement and moreover, has payments shaped like an employment agreement, the courts will treat it as an employment agreement. 

Hence you need to be very careful about the clauses you put into an independent contractors agreement. If it smells like an employment agreement to the taxman, they will come for you.

Looking to hire an independent contractor and have questions about how you should frame the terms? Book a call with us on the link below for FREE guidance on this.