Contractors can help your business
-- if you follow the rules
By Pat Curry • Bankrate.com

Bob Farrar is an attorney in Rome, Ga. The staff in his solo practice consists of a part-time secretary, who works with him in the office; a part-time paralegal, who works from her home in South Carolina; a bookkeeper in Florida, and a virtual assistant an hour away in Atlanta, who helps with office and case management.

Three years ago, Farrar had two full-time people taking care of all the tasks in the office, whether they were good at them or not.

Miracle workers
"My bookkeeping was in a shambles," he says. But the Florida bookkeeper has changed all that. "She balances the checkbooks and does management reports like I've never had in my entire practice. I've waited 23 years for decent management reports in-house ... I'm absolutely amazed."

Farrar pays his contractors only for the time they spend working on his projects and doesn't worry about filling up their days. He doesn't have to deal with withholding, Social Security or Medicare, and he doesn't pay for their benefits or vacation time. He's also not footing the cost of their equipment or the space to house them.

He figures the arrangement is saving him $7,500 a year in salaries, benefits and taxes. The savings on computer equipment and software is at least another $3,000. If he moves from the five-room suite that costs him $9,600 year into a better-suited space with four rooms, he will save another $2,500 a year on rent.

Farrar is among an ever-growing number of business owners turning to independent contractors for services. Anthony Marolda, vice president of TAC Worldwide Cos., a global placement company, says the growth has been fueled by two economic issues:

"On the corporate side, there's downsizing. Companies made a conscious decision to run leaner and meaner," he says. "In terms of smaller businesses, more entrepreneurial companies, there's a pointed issue of labor supply and the expertise that's available."

"It gives them the opportunity to see what's the best expertise out there and lowers their time to market if they can find people to do what they need done (rather) than try to invent it off-the-shelf themselves," he says. "All of what really is done in (information systems) and product development is project-based."

There is no central clearinghouse for independent contractors, but business owners can ask associates for referrals and then solicit bids, with references. Contractors who have long-standing relationships with their clients can be a good bet. For a small fee, owners can do an online search of public records to determine if someone they are considering has ever been sued, filed for bankruptcy or the like.

While contractors can help business owners cut costs and increase productivity, they can't necessarily reduce an owner's liability. A contract alone is not enough to shift liability to the worker, says Marjorie Johnson, an analyst for CCH Inc., which tracks changes in tax- and business-related law. If an employer retains control of aspects of the worker's job, the employer could be held accountable for shoddy workmanship, unkept promises or in the worst case scenario, criminal behavior.

The IRS is watching
And business owners have to be especially careful even in identifying workers as contractors, or they can find themselves up against the IRS. It's so tricky that the agency offers a 20-point checklist to help employers label their employees.

The National Labor Relations Act and the Fair Labor Standards Act also provide tests for classifying independent contractors. "They're a little bit different, but the major issue will be one of control," Johnson says.

Hiring contractors may mean forgoing development of future leadership for the company and hiring a new mindset. "Contractors are there to do a specific task and then they're out of there," says Bob Gatewood, associate dean of academic programs at the University of Georgia Terry College of Business. "They're usually less willing to internalize the goals of the organization or do anything not directly specified with their contract. That doesn't fit very well with the dynamic of many small businesses trying to be responsive to customer demand because that's the only way to exist."

But Farrar says he has seen nothing if not loyalty. "These people are deeply involved in the success of my law practice. I've rarely seen that in employees. They have a business of their own, so they understand the way a small business works. They're a partner instead of an employee."

Pat Curry is a freelance writer based in Georgia

-- Posted: July 26, 1999