Q&A: Paying Independent Contractors
Photo Credit: Mike Knapak via Flickr

Dear Meredith,

Here is the situation: What is your opinion on canceled appointments and paying independent contractors? I run a tutoring business and have a few independent contractors for special subjects like math – until the business builds and I can hire them full-time.  When parents cancel appointments for nonrefundable reasons (birthday parties etc.) they still have to pay us for the appointment.   Do I still pay my tutors the money from that appointment and take my 30%? My own inclination is to say yes, pay my tutors, but does that get tangled up with the time worked etc aspect of things? What are your suggestions?

-B

***

Hi, B!

First, check federal, state, and local laws to see if there are any rules about how independent contractors should be paid. Thoroughly read the IRS guidelines for independent contractors. Your local Department of Labor or comparable bureau should be able to tell you if there are any special rules that apply in your area. 
If there aren’t, it all boils down to the contract you signed with them. Each IC contract should list criteria for how they get paid — what hours, what kind of work, and other factors. Most independent contractors are paid for “work completed.” Unless your contract says differently, you’re not under any obligation to pay them for the cancelled appointment. 
Remember that what you’re legally obligated to pay them is the bare minimum — and the minimum may not make the best business sense. There are three other factors you should consider before you make a decision:
1. Respect for People
First and foremost, show respect for their work and your relationship. One of the pillars of the LEAN school of quality management is “Respect for People” (Mark Graban at LeanBlog just did a great article about it here – Go read it! It’s worth taking 5 minutes to hear what he has to say about building better relationships with your team). “Respect for People” means that you view the people you work with as valuable peers, not instruments or means to an end.  Independent contractors aren’t diet employees — they’re your strategic business partners. Your success depends on respecting and developing that business relationship. Whatever you decide, make sure that it shows respect for the people who work with you, represent you, serve your clients, and make you a profit.  If you ever have to chose between making a little extra profit and showing extra respect for your workers, err on the side of respect! You won’t regret it. And in the long run, you’ll earn loyalty, a good reputation, and get better results from your contractors.

2. Timing

Did the parent cancel more than a day in advance? Were you able to give the contractor plenty of notice? If so, you aren’t obligated to pay them anything. They didn’t have to do any work.

If there was no notice at all and the tutor showed up at a house and waited,  they should always be compensated fully for their time and professionalism.

3. Nature of the Work

Different industries require different amounts of preparation, and you should always consider that before you decide to pay or not to pay.  Do your tutors have to do prep-work before each appointment? If so, do you pay them for that time? If you do, they’re already being fairly compensated. But if they aren’t paid for their prep time, you should consider paying them to compensate them for the work they did complete. You may not pay them for cancellation, but they should be compensated for the work they’re required to do.  If your contract requires a lot of uncompensated prep-work and there’s a high-risk of cancellations, you should consider revising it to be fairer to your contractors. You will never regret being fair and respectful to the people who worth with you and keep your business running. 

If you’re still struggling to decide, consider just paying your contractor if you can do so without violating IRS guidelines for independent contractors. You’ll still make a profit, and you’ll send a message to your contractor that they can trust you and that you respect them.  As your business grows, you’ll have the option of turning those independent contractors into full-time employees — and they’ll be happy to keep working with you.  If they don’t end up becoming employees, they’ll still be advocates for you and your business.
More resources:
Via NOLO – Law for All
NOLO.com has free legal information about working with independent contractors — everything from hiring to protecting your intellectual property. 
via the Wall Street Journal
Know the basics of hiring contractors, and how the IRS defines the difference between an employee and an independent contractor. 
via Washington State Department of Labor and Industry
For Washington State businesses only! You can download an entire guide to state rules for ICs from this site. If you aren’t located in Washington, call your state’s labor department to find out if they have a similar publication. 
The advice and information in this article are for informational purposes only. You should always talk to a legal and accounting professional before you make any decisions about employment and payroll. Check out your local Small Business Association (SBA) or call your Chamber of Commerce for recommendations.  Seriously. Don’t make decisions in a vacuum. Get real recommendations from people with wide experience and reputation to uphold. They should be a real professional who knows both your area and your industry. If you wouldn’t trust an amateur to operate on your heart, don’t trust one with your finances or business!

A physicist by trade, author by choice, a born teacher, a retired veteran, and an adamant problem solver, Frank has helped the White House, federal agencies, military offices, historical museums, manufacturers, and over 250 technology startups get stuff done, communicate effectively, and find practical solutions that work for them. In his spare time, he makes sawdust and watches Godzilla movies.