If you’re growing a successful business, you’ve probably learned along the way that you can’t do everything. To help you grow your business, you may decide to bring in a consultant to help you tackle a certain challenge or to help you set up a new aspect of your business. Consultants are a great resource for any business, whether you’re looking for management advice or marketing assistance. They’re great at providing highly skilled help, but they are also a source of liability, and there’s a few things you will want to keep in mind before you retain a consultant for your business.
Making Sure Your Consultant Is an Independent Contractor
First, it’s important to ensure the consultant you’re hiring will be considered an independent contractor and not an employee. The recent California case, Dynamex Operations West, Inc. v. Superior Court, outlined an “ABC” test to determine whether someone is an employee or an independent contractor. When hiring a consultant, even if they have their own business, you still want to review these factors and ensure you’re setting them up as a contractor. This new decision has some serious repercussions for businesses who are hiring gig workers, and it’s important to separate out your on-demand labor from your consultants.
While there is some variation, the new test has three basic “prongs.” Your business attorney will help you review the specific situation to ensure your consultant does not violate any of these three prongs and that both the consulting agreement and your day-to-day setup create a contractor, and not an employee, relationship.
- The worker is free from the control and direction of the “hirer” (or the business) in connection with the performance of the work, both under the contract for the performance of such work and in reality;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the “hirer.”
Verifying the Consultant’s Credentials
Just as you would when hiring an employee or working with a vendor, you want to make sure that the consultant is who they say they are. If they’re working in a field where a certain type of license is required, you want to be sure that their license is up to date and that they’re in good standing. Often, this information is available (and searchable) online through the appropriate licensing board.
In other situations, you may need to request references from the consultant in order to confirm that the consultant is trusted and has proven themselves capable of performing the work you’re considering. If you’ve found your consultant based on word of mouth from someone in your network, you can always ask your contact to provide additional references. Beyond protecting yourself, checking a consultant’s references can also provide you with first-hand insight into what it’s like to work with a particular consultant or consulting firm.
Consultant Agreements & Common Pitfalls
Once you’ve decided to hire someone as a consultant, it’s important to make sure you have a written agreement in place between your business and the consultant or their business. This document should clearly outline the scope of work you expect the consultant to complete, the time frame for the project, and the expected compensation. It’s a good idea to bring your business attorney to the table at this point so they can review the arrangement, help you avoid a number of common pitfalls contained in many contracts and consulting agreements.
In addition to ensuring that your consultant is truly an independent contractor, there are a few other common clauses you should pay attention to in your contracts with your consultants including detailing total costs and contingency calculations, payment schedules, and ensuring that the consultant is held liable for their actions under the agreement and for any of their misconduct while they work with your business.
When thinking about costs and payment schedules, know that consultants often like to be paid on retainer. This arrangement provides a clear understanding for both parties of the cost of the arrangement. However, the contract should clearly include when the retainer is due, what time period that payment covers, and the refund of the retainer in the event that the contract is cancelled before the paid-for work is completed. Paying attention to this detail at the start can help provide a positive working relationship that comes to a smooth conclusion.
Of more concern in consulting agreements is who will be responsible for damages caused by or arising from the consultant’s actions. Exactly what those damages are depends on exactly what you hire the consultant for but are always important to consider at the initial agreement stage, especially when the consultant does work outside the scope of your general business insurance policy. When applicable, indemnification clauses can not only shift responsibility to one party or the other, but they can also limit the total cost of any liability. Because of this, you should carefully consider these clauses in any of your consultant agreements, to ensure that they protect your business and that they’re reasonable for all involved.
The bottom line of all of this is that, when hiring a consultant, it’s wise to talk to your attorney first. You’re excited to bring in someone who can help you take your business to the next level, and you don’t want that excitement to be ruined by future problems. Reach out to DeAnn Flores Chase and her team at Chase Law Group, P.C. to help you discuss those projects where you’re thinking about retaining a consultant, they can help you review the contract to make sure there aren’t any unexpected issues. Schedule your appointment by calling (310) 545-7700