What Is An Independent Contractor?
Independent contractors are individuals or businesses that provide services for companies or other individuals, without being employed by them. Independent contractors pay their own income and social taxes in their country, and are able to deduct expenses from their income.
Businesses that use the services of independent contractors typically do not need to pay employment benefits such as health insurance, pension, vacation or sick leave, and severance pay. While this is beneficial to the employer, there are strict rules in each country about who can be considered an independent contractor, and companies must correctly classify each worker, to ensure they are treating workers fairly and to avoid legal and compliance risk.
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What Are Contractor Payment Rights?
As a contractor who provides services to companies or individuals for a living, you should be familiar with your legal rights. It is important to understand your tax obligations, to ensure you do not pay more taxes than necessary. Also, while contractors typically do not have the right to social benefits, your customers do have legal obligations when contracting you, and you should be aware of them to ensure they treat you fairly.
Right to a Contract
Sellers who do not have a legally binding contract with their customers are vulnerable to mistreatment. In most countries, you have a legal right to sign a contract with your customer. A formal contractor agreement protects you by clarifying your work obligations to the customer, specifies when and how much the customer should pay you, and designates you as an independent contractor and not an employee.
If you are a US citizen, make sure your contract specifies that your relationship with the customer is project-oriented—in other words, the contract should clarify that you are performing a specific project for the customer and not fulfilling a general function or role. Otherwise, state or federal agencies may consider you an employee.
Make sure the contract clearly states the functions to be performed, a full project description, timeline and milestones if any, billing terms, payment methods, and fair terms for termination of the contract. Negotiate your contracts to ensure they are fair, and do not enter a contract that can put you or your business at undue risk.
Right to Provide Your Expertise
As a contractor, you are considered an expert in your profession. This means customers should not force you to undergo training or overly guide how you perform your duties. Clients should allow you to perform your work as you deem appropriate. It is your responsibility to update your skills and complete any additional training or certifications required for the job.
Right to Receive Payment
Employees are usually paid on a fixed schedule, such as weekly or monthly, and taxes are typically deducted from their salaries and transferred to the local authorities. By contrast, contractor payments are made according to the specific contract you have signed with your customer, and paid against an invoice. That's why it's important to have a written contract outlining when, how, and how much you will get paid.
Independent contractors usually submit invoices describing the work performed and the amount of compensation required. The contract specifies when and how you will send an invoice and receive payment. Insist that customers respect your payment terms.
Right to Manage Your Own Business
As an independent contractor, you run your own business, and you are responsible for providing your own social benefits. Your customers are not responsible for providing regular employee benefits such as pensions, health insurance, sick leave, paid vacation, and disability insurance. At the same time, you have a commercial right to enforce your contracts. If a client does not pay you, or otherwise violates your contract, you can sue them in a court of law.
Right to Your Own Tax Responsibilities
As an independent contractor, you are responsible for paying your own income taxes. In the US, contractors pay self-employment taxes, which include Social Security and Medicare payments that would ordinarily be paid by an employer. At the end of the year, or whenever required by your local tax authorities you must report your income and deductible expenses to the authorities. In the US this is the 1099-MISC form, which is submitted once per year.
4 Ways to Make Sure You Get Paid by Your Customers
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Communicate
Contact non-paying customers and let them know they owe you money. In many cases, you will find clients are not aware of the payment or the fact that it is now due, and will pay when you remind them.
If you find a client is unwilling to pay, do everything you can to resolve the situation without resorting to legal measures. Meet with the relevant people at the company, explain the situation, and try to provide any information the client needs to approve your payment. If worse comes to worse, threaten to sue—but remember that the cost of taking customers to court can be high, and this will also ruin your future relationship with the client.
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File a Mechanics Lien
In the US, subcontractors and suppliers who work on a property (for example, building contractors or repairmen) can file a “mechanics lien” against their customer’s property. This will make the customer’s property less liquid, and they will find it more difficult to secure funding against the property.
It is possible to use this legal instrument even if you are a subcontractor and the upper-tier contractor on a project owes you money. Filing the lien will immediately make the upper-tier contractor and the end-customer aware of your payment. This is considered the fastest and easiest way to collect an unpaid fee for a construction project.
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File a Breach of Contract Claim
If you cannot file a mechanics lien, you may be able to recover your funds through a breach of contract claim. The best option is to use a small claims court, but if your claim exceeds the maximum amount, you will need to use a lawyer’s services. Legal services are expensive, and you need to consider the overall cost of the lawsuit, and the chances of success, against the amount owed to you.
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File a Prompt Payment Claim
The US has a prompt payment law in all states except South Carolina. This mainly applies to individuals who file an insurance claim. The law requires the insurer to either pay or deny the claim within a timeframe of 30-60 days (depending on state). If the insurer fails to do so, the client can file a claim for immediate payment in civil court. It is recommended to hire an attorney to understand if a prompt payment claim is relevant in your case, and file the claim in an optimal manner.
Conclusion
In this article, I explained the legal rights you have as a contractor have when dealing with customers, and provided four options for improving collection of money owed to you by clients:
- Communicate - reminding clients about debt and having an open discussion if there are any disagreements is the fastest and easiest way to collect payments.
- File a mechanics lien - in the US, contractors in the building industry can file a lien against the owner of the property they worked on, until their payment is settled.
- File a breach of contract - this equated to suing your customer, which can be time consuming and expensive, but is worthwhile for large debt that cannot be collected otherwise.
- File a prompt payment claim - suitable only for specific types of debt, most commonly insurance claims that are not handled fast enough by the insurer.
I hope this will be useful as you improve your collection, revenue, and ongoing relationship with your customers.
