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CHAPTER 11: BUYING FROM PROFESSIONALS: HIRING CONTRACTORS
Small organizations frequently need to contract for services that employees provide in larger organizations. For example, you may contract with an individual to plan and run a fundraising event or prepare grant applications when you don’t have a development director on staff. Like many decisions that seem purely beneficial on the surface, this one has complications. If you are aware of them and take steps to do everything you need to in order to protect your organization, you will enjoy the benefits of hiring contractors and make life easier for yourself. If you’re not, it could cost you!
Read this chapter for guidance on: writing and managing contracts with service providers, and determining whether a contractor should be treated as an employee.
Important Points:
Producing the Written Contract
Think of a contract as a written form of what you and the other party have already discussed and agreed upon. Having your agreement in writing helps to protect both of you by giving you and others associated with the contract a place to refer to if misunderstandings arise. A written contract can also help you make sure you’ve been thorough in your agreement and you haven’t left anything out. Agreements can fail later if you gloss over something both parties assume they agree on but, in actuality, may not.
Sometimes, you may be tempted to forego the contracting process. Especially when you’re working with people you know socially or through your family, it is easy to feel that requiring a written agreement may be interpreted as a lack of trust. I strongly encourage you to overcome this feeling! If you ask ten people in business about their experiences with not putting contracts in writing, I’ll wager at least nine of them can tell you a story about a ruptured friendship, a broken partnership, or money lost because they didn’t write out an agreement.
The mechanics of writing a contract can be simplified by breaking the contract into two parts: boiler-plate language, and language specific to the project at hand.
“Boiler-plate” is a term for the contract language that is consistent for all contracts of the same type. You can get help for this part from an attorney or you can perhaps borrow the format used by another organization. Boiler-plate will include definitions. It will address confidentiality requirements, methods of resolving disputes, requirements of contractors (e.g. they must carry their own worker’s compensation insurance), and so on.
Language specific to the contract at hand either appears on the front page of the contract or can be divided between the front page and an attachment. Using an attachment has the advantage of keeping the front page of the contract uniform for all agreements, except for the name and address of the contractor, and can help prevent errors in the text.
The front page of the contract will always include:
· the name and address of the contractor;
· the name and address of your organization;
· the name of the person who’s responsible for managing the work at your end.
Other information can be included either on the front page or in an attachment:
· the scope of the work: that is, a detailed description of what you are hiring the contractor to do;
· the effective dates of the contract;
· the contractor’s rate and manner of compensation (e.g. hourly, bids for each stage of a project, etc.);
· the timing and amount of payments;
· description of deliverables and when they are due;
· penalties for late or non-performance;
· frequency of invoicing.
On the final page of the contract, there should be lines for signatures – one each for the responsible party at your organization and at the consultant’s – and lines for the date each of them signed. If you choose to, you can also require the consultant to fill in their taxpayer ID number and indicate what type of entity they are so that the signature page can function as a substitute W-9, though I recommend that you obtain a W-9 separate from the contract.
What’s a W-9? It’s a form the IRS created as a way for you to gather information you need in order to:
You can find a blank one at www.irs.gov.
Determining Status: Contractor or Employee?
At first, it may seem that the organization is at an advantage treating workers performing services on a part-time or temporary basis as contractors, but there can be consequences that outweigh avoiding the 7.65% FICA + Medicare tax. Government tax agencies – either local, state or federal – can audit your payroll records and, if they determine you paid someone as a contractor who should have been treated as an employee, they can fine you quite heavily as well as charge you all the payroll taxes you should have paid, including amounts you would have withheld for the employee’s state and federal income taxes and their half of the FICA tax!
The test to determine the correct status of anyone providing services is an objective one; you and the other party may both want contractor status to be the one for your contract, but it is not up to you and wishing will not make it so! Unfortunately, while the test is objective, it can also be complicated and the right answer is not always clear. There is ample guidance available, though, and you should use it to reach the best decision you can reach. Generally, people are not self-employed if they provide services to one “client” and:
· are not holding themselves out as business operators;
· do not risk losing money if their performance is not as agreed; and
· work under the direction of others.
You should consider people who fit this description to be employees and treat them accordingly, even if their work is short-term, irregularly scheduled, or for only a few hours.
People who:
· are professionals or
· either hold a professional license or have ample experience in managerial or leadership roles and are making use of that expertise by hiring themselves out, and
· work independently or in a supervisory capacity
are self-employed. You can find more complete guidance in IRS Publication 15-A at www.irs.gov/publications/p15a. You can also request a determination from the IRS by using form SS-8. Simply reading this form may help you understand the factors to consider in determining a person’s status even if you don’t complete and file it.
Authorizing, Negotiating and Signing Contracts
Each of your employees should know whether they are authorized to commit the organization to hiring contractors and what the process is for doing so. Those involved in contract setup should also know the answers to the following questions:
· Do you require competitive bids?
· Do you have certain goals to reach in selecting contractors?
· Do your funders have requirements you must abide by?
· What are the budget constraints?
· Who is responsible for determining the employee or contractor status?
· Whose approval is required once negotiations are complete?
Managers will benefit from your feedback during the negotiation phase, so let them know you’re available to help when they ask.
It’s important to realize that contracts get made every day, and while some of them are the result of extended negotiations and involve sizable amounts of money, they can also be quite small. People may not realize that when they ask a friend in a sister organization to perform a few hours of work, they are committing the organization. The agreement they reach should be formally written down and approved. You in accounting do not want to see requests for payment arriving without any idea how to charge the expense to programs or whose approval you need to get in order to pay the invoice.
Once a contract is final, two copies should be signed by both parties. One copy stays with the contractor and the other one is kept on file in your department so that the original copies of all contracts are in one place. Make a photocopy of the signed original for those people responsible for managing performance under the contract.
Accounting’s Responsibility for Managing Contracts
Be familiar with the boiler-plate language your organization uses. Each time a new contract is let, read the scope of work and other specifics and incorporate any requirements that affect you into your work schedule. For example, if the contract calls for monthly payments of $1,000 for three months and a final payment of $2,000 when the final product is accepted, you could set up a monthly recurring voucher for three months to remind you to check with the contract manager for authorization of the payment. If the contract states that the contractor will bill you, you don’t need to do anything until that invoice with payment authorization from the manager comes across your desk each month.
It should go without saying, but it doesn’t: you should only pay a contractor when they’ve performed in accordance with the agreement you have with them. Especially if managers are inexperienced or if the contractor is a friend or a friendly organization, there can be a tendency to not demand performance in accordance with the contract. The money they want from you is your leverage; don’t waste it by paying them before you are satisfied. Your oversight can be helpful to managers who are wavering or unsure of what to do, and may keep a potentially successful contract relationship from becoming an unsuccessful one.
There’s more on closely related topics in Chapter 9: Buying from Vendors and Chapter 19: Distributing Shared Costs.
Take Action
Review some of your organization’s recent contracts and consider whether the format described in the first section of this chapter would work for you, i.e. boiler-plate language and contract-specific language in separate sections.
Review your current contracts to make sure all contractors would be considered contractors by the IRS. Verify that you have a completed and signed W-9 from each one.
Work with the ED and the board, if appropriate, to document the authority each employee has to commit the organization to contractual relationships. Share this document with the staff once it’s been approved.
Make sure all original contracts are filed together, in the ED’s office or yours, and that managers who need contracts understand they should work from copies.
(c) Nancy Church, 2006
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