With the economy in the doldrums, small businesses are increasingly hiring consultants rather than hiring full-time employees.
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From a financial standpoint, consultants make a lot of sense. But the downside is that the consultant that is working for your today, could be working for a competitor tomorrow.
Does that make you feel uncomfortable? It should. And that's the just the beginning of the negative scenarios you could encounter unless you carefully define the nature of your relationships with consultants. Keep in mind that consultants are not employees. They are independent contractors who have agreed to perform specific tasks in exchange for a fee. If you throw around the term "consultant" too loosely and use it to define everyone from office temps to part-time maintenance staff, you will dilute your ability to legally defend the employer/consultant relationship in your business.
Instead, best practices dictate that you should reserve the term for individuals who are legitimate consultants, in a relationship that is clearly defined by a consulting services agreement that contains the following critical elements.
- Services. Consultant services agreements define the scope of the services that will be provided to the company. Since consultant activities can vary widely, your agreement should identify the area or department in which the consultant will work and offer as many job specifics as possible – without unintentionally constraining their activities.
- Remuneration. Your agreement should describe the remuneration the consultant will receive for his efforts on your behalf. Compensation is usually at a rate of "x" dollars per hour, pursuant to itemized time sheets that the consultant submits to the company's HR department. The agreement should also discuss expense reimbursements including travel and lodging.
- Description of relationship. For legal and tax purposes, your agreement should make it abundantly clear that the relationship is consultative and not a typical employer-employee relationship. The company retains ownership of the work produced and will not pay employment taxes on the consultant's behalf.
- Confidentiality. A sound consultant agreement always includes a confidentiality clause. If you require the consultant to sign a separate confidentiality or non-disclosure agreement, make reference to it in the consultant services agreement.
- Term. Nothing lasts forever, including the relationship between a company and a consultant. The consulting agreement describes both the start and end dates of the relationship, with possible provisions for extensions.