Why? ICs are a handy way for small businesses to expand and contract their workforce as needed.  But it’s easier (and more lucrative) for the tax authorities to collect withholding taxes from one employer each quarter than to hope—and hope is the operative word—for ICs to pay in that same revenue when they file their tax returns months later.

This happened to a client (for illustrative purposes we’ll call them “SB Training”). SB Training hired a colleague on a handshake as an IC to deliver a training program. SB Training paid the IC when the assignment was completed.  But when the IC filed for unemployment insurance (because the IC had been let go from her full-time job), she named SB Training as a place where she had worked in the previous year—and unwittingly sent SB Training down the rabbit hole.

SB Training said “She’s an IC!” The IC said, “I’m an IC!” The taxing authorities said, “Too bad—the IC didn’t have an independent business because she worked full-time elsewhere … so wasn’t a proper IC.”

And because they now have integrated computer database networks, the Workers’ Compensation and Disability agencies were salivating like hyenas ready to pounce on an injured zebra, awaiting the final determination.

To preclude this type of situation in your business and keep tax enforcers at bay, you’ll want to document all agreements with ICs. The IC determination process is complex, and you should seek expert help, but here are a few standard issues every IC agreement should include:

1. A clear description of the task.

Define the work to be performed, the time-frame for doing the work, and the IC’s specific responsibilities and reporting requirements.

2. Payment terms.

There should be no confusion here.  State how much the IC will be paid, when payment will be due, and how payment will be transferred.  Clearly state that no employment taxes are being withheld and that the IC is responsible for paying any taxes due.

3. The contract term.

The agreement should provide for termination of the contract, either at a pre-determined date or by a decision of either or both parties.

4. Confidential information and intellectual property (IP) rights.

If the IC will be privy to any of the company’s confidential information, or if the IC’s work could contribute to the production of new proprietary assets for the company, the agreement should confirm your ownership of that information and assets against any claims of the IC.

Tip:  The IRS and many states have announced increased enforcement of IC misclassifications.  There are a number of factors that agencies consider when weighing wither a worker is an employee or independent contractor.  Be familiar with them as you structure your work assignments.

For more about the 20 different factors that the IRS looks at, read my article, “How Independent Contractor Agreement Protect Your Pocketbook.”

Connect with Nina on Twitter.

Did you enjoy this article? If so, subscribe to YFS Magazine and never miss an update. Don’t forget to make our friendship official and join Young, Fabulous, and Self-Employed entrepreneurs on Facebook.

Photo: Francis Leon

Author and Careerealism writer, Amanda Hathaway suggests “building workplace relationships is an important component of being successful in your career. This doesn’t mean you need to be completely extroverted in every situation, but it does mean you need to make an effort to get to know the people with whom you work and learn about what skills and abilities they bring to the table.”

However, MillenialCEO writer Daniel Newman believes there is a, “delicate balance in [a] relationship between an employer and their employee.” Newman recommends considering the complications that can arise between employer and employee relationships: “While It may not be possible to entirely prevent these, and in fact you may have a few of them yourself. It is very important that you recognize the risk associated with these types of relationships so you can better manage them.”

We asked entrepreneurs if befriending employees is a recipe for success or disaster — here’s what they had to say:

1. Build mutual respect, but know where to draw the line.

“[Being friends with your employees] helps establish a respect between bosses and their workers. [I feel] it is better to establish a level of mutual respect based on positive, close and friendly interactions then having no respect from employees who do not like their boss. [I] feels this mutual respect creates a more positive atmosphere in the work place and, as such, employees enjoy working in his company. [I do] feel, however, that there must always be a line and does not think actions like drinking heavily with employees shows any leadership qualities or establishes any mutual respect. Employees have to know they are there to deliver results, but they should be able to get along with their boss and feel he is approachable.

- Mark Pearson, Founder and Chairman of MyVoucherCodes: @MyVoucherCodes

2. Joke, laugh and have a good time, but don’t get personal. 

“The work at my company requires a mix of creativity and analytical thinking so it is important for me to maintain the right tone in my office. I genuinely care about each of my employees and I am friendly to all of them. After all, work should be fun right? However, I avoid becoming friends with them by not asking personal questions. For example, my assistant’s sister got married last weekend. When she returned to the office on Monday I asked how the wedding was and if she had fun, but I didn’t ask for details. Once she indicated it was fun, I told her I am glad she had a good time and changed the subject. We joke, we laugh, and we have a good time; we just don’t get too personal.”

- Lori Riviere, Concept Commander of It Marketing Concepts: @shortcuts2fab

3. Employer — employee relationships help startups thrive.

“In a startup environment, I believe you should treat employees like friends. When starting a company, especially with low funding, you need to keep the friendliness high because often a strong business mentality can be mistaken for being unfriendly or rude. A perfect example is Steve Jobs. Some viewed him as a dictator where others saw him as a visionary. Sometimes greatness can be misunderstood.”

- Michael Austin Jacobs, Co-Founder and CEO of SociaLink App: @SociaLinkApp

4. Be friendly with employees on a case-by-case basis.

“Treating employees like friends is a delicate balance between understanding their level of maturity, capability and motivation and not clouding the boundaries between a working relationship and acquaintance.  A relationship with a mature, competent and motivated employee can quite easily become one of friendship and someone of quality will recognize that eventually the boss has the last say, when a business issue is involved.  A relationship with a less mature (possibly younger) or less worldly employee should always be kept on a work related basis, since the boundary between company success and employee errors may cause moments of awkwardness, particularly if a worker is not performing to standards expected by the management.”

- Andrew Mills, Founder and Owner of NEPHRIA Jade Beauty Products: @Nephria

5. Treat employees like friends — always.

“You should treat employees like friends because it’s easier to create a mutual respect that way. Employees should not respect you just because you have the title of ‘boss,’ but because they know you’re doing what is right for the company and [themselves]. It’s easier for them to know this when you have a personal friend relationship and not just a work relationship.”

- Kelsey Meyer, President of Digital Talent Agents: @Kelsey_M_Meyer

Not to mention the possibility that, at times, the hiring mistake was “mea culpa” – i.e. you hired someone that you knew would not be a great fit for your organization, but needed the manpower short-term.

Nolo.com, a site that helps small businesses find answers to everyday legal and business questions, explains that, “The law gives employers a great deal of leeway in deciding whether to fire an employee…” Firing an employee due to misconduct or underperformance is often necessary and warranted. By now most are familiar with the term “at will” employment, a concept that means either the employer or the employee is free to end the employment relationship at any time, with or without notice or cause. You may even want to pay some employees to quit.

Are all of your employees perfect in every way? Of course not. But you are only as strong as your weakest link. So, here are three types of employees that you should probably let go, sooner than later.

The Complaint Artist

Negative Nancy is her name and whining is her game. The complaint artist is always feeling pained, dissatisfied and ultimately resentful. What Negative Nancy does not know is that there is a clear difference between complaining and discussing topics in a constructive way. It lies in our attitude – our motivation – for speaking in the first place.

Excessive complainers and whiners are toxic employees that will negatively impact team morale. Psychologist, Michael Cunningham, Ph.D., explains: “Unhealthy complainers bellyache to anyone who crosses their path … chronic complainers get stuck in victim mode, and that irritates the people around them…” He asserts that, “bad complainers are annoying at best, depressing at worst.”

It is important to first understand the underlying causes of an employees’ dissatisfaction.  Do your best to learn why he or she is unhappy at work. If you take time to listen, complaints can provide insight into your organizational blind spots and areas for improvement. However, if the complaint artist insists, “it’s me not you,” and that he or she is just not that into your company, it’s time to part ways.

The Slacker

The rest of your team is looking around for the memo they missed to understand why The Slacker is still employed. This type of employee is biding his or her time and it’s evident by the fact that he or she never get’s anything done.

Work, assignments and general productivity are foreign concepts. The slacker’s overall laziness has impacted his or her overall performance – while warnings, disciplinary action and one-on-one chats have proved ineffective. If you are at your wits end, address performance issues early.

Carolyn Stoll Sokol, founder of PEOcompare.com (a company that helps match small businesses with Professional Employer Organizations (PEOs)) asserts, “A lazy employee is undesirable. Period. Fortunately, as the small business owner, you have the opportunity to address and correct this problem.” Sokol suggests, “First, speak with the employee. If improvements are not made within a reasonable amount of time, speak with an [HR consultant] for your options.”

Building credibility with your team is essential. “Credibility is often considered to be at the foundation of leadership. Regardless of how smart, sophisticated and savvy you might be, if your colleagues or direct reports don’t believe you, then they won’t willingly follow. People have to believe that your word can be trusted — you will do what you say you will do — and that your actions are aligned with your words.”

Eleven entrepreneurs share how to effectively increase credibility with employees:

1. Facilitate creativity in the workplace.

“Build your employees the same way you build your brand; engage them, enrich them and allow them an unrestricted environment to create. At BrightLine we use the phrase ‘data driven design’ and that is fueled by the individual creativity of our global human capital. We engage employees the same way we create interactive advertising–we consistently work to turn monologues into  dialogues.”

- Rob Aksman, Co-Founder and Chief Experience Officer of BrightLine: @BrightLine_TV

2. Give employees consistent feedback.

“By giving constant feedback, good or bad, you can develop a great relationship with your team. It’s key to make it a two-way street by encouraging your team to give you feedback as well. Too many leaders are afraid of negative feedback, but it’s an essential part of growing as a person and inevitably it’s essential to [growing] your company.”

- Tom Ellingson, Co-Founder and CEO of Fandeavor.com: @fandeavor

3. Practice servant leadership.

” … Practice servant leadership, which I explain to team members as, ‘Your role is to catch fish. If you don’t know how, I’m happy to show you, though you’re welcome to do it your way as long as the results are good.’ My role is to provide resources and solve problems, such as additional fishing poles and finding the best fishing holes.”

- Jeff Pieta, President of Shiftgig: @JeffPieta

4. Never ask employees to do something you aren’t willing to do.

“My first boss out of college gave me a piece of advice that I will never forget.  He told me to ‘never ask an employee to do something I am not willing to do myself.’  When you are running a small business, that can be everything from taking out the trash, making coffee or learning a new skill that will benefit the company.”

- Kate Ross, Principal of Ross Business Management: @RossBizMGMT

5. Educate and empower employees.

“Empower [your employees] to make decisions and support them in those decisions. Where you as the business owner may disagree, have dialogue about alternative solutions going forward. Further the empowerment by helping team members learn how to make better decisions–host office-wide ‘lunch and learns,’ invite them to attend local seminars, workshops, and lectures … and challenge staff with questions and alternatives, etc. Always be fair, honest, open and approachable. Communicate to team members that they are empowered to have a voice and to use it.”

- Caroline Callaway, President of Bolt Public Relations: @boltpr

6. Be the standard, be honest, and show your human side

“Be The standard. If you want employees to work hard, deliver quality, and care about customers, then quite clearly you need to do the same. Too many times small business owners think that the company rules don’t apply to them.  I think quite the opposite; you need to be the living example of the rules. [Being] honest also seems like a no-brainer, but keeping secrets from staff, talking in political-speak, and telling half-truths are all wonderful ways to destroy employee trust. Show your human side. At the end of the day, teammates want to know that their boss is a human being. Taking a genuine interest in their personal lives, spending some time together outside of work (but not too much!) and sharing who you are as a person is a great way to earn loyalty and trust.  Basically, be a good friend and mentor … not just ‘the boss.’”

- Casey Holloran, Co-Founder and Chief Marketing Officer of Costa Rican Vacations: @CRVTravel

Talking to an underperforming employee ranks right up there with telling your significant other that he or she is not pulling their weight in a relationship. Not something you really look forward to; but if you don’t nip the situation in the bud early, it will fester until it reaches ugly proportions. You need to handle the situation directly, and tactfully. A boyfriend or girlfriend may get mad if you handle the situation poorly . . . but an employee could get litigious.

In response to a question posed in an issue of New York Enterprise Report, Barbara Kurka of the Katz Media Group offered these suggestions for turning the situation around:

1. Think before you speak.

This is a delicate situation that needs to take place in a private setting and not handled in a rush. If you’re not prepared to explain, dispassionately, how an employee is not measuring up and what she can do to improve, you’re not ready for the conversation.

2. Know your standards.

What does underperformance mean for your company and for that specific position? Are you using objective standards to measure performance (e.g., sales figures, renewed contracts)? What does the position require?

The less objective your standards are, the more you could be wandering into a potential discrimination lawsuit.

3. How long has the employee been underperforming?

Is an employees’ misconduct or underperformance a chronic or situational problem? If it’s chronic, perhaps the employee isn’t right for the job. Or perhaps your company standards and benchmarks have not been clear.

If the problem arose recently, look at factors that might have had an impact: industry conditions, lack of cooperation from other employees or personal problems. While you want to listen attentively, you should steer the conversation back to “what will get the employee to meet our standards?” You don’t want to get embroiled in sagas of personal problems.

4. Decide what you’re willing to do to help the situation.

Are you willing to provide training or other resources to help the employee improve? Within what (realistic) time frame do you want to see improvement? Confirm your conversation in writing. Make a plan for improvement that both you and the employee feel comfortable with, and set realistic goals for achieving it. Follow up on deadlines and timetables.

Like many employee-related situations, difficult conversations can lead you into thorny legal issues. Get some coaching from your company’s employment attorney to learn the right way to conduct them.

Connect with Nina on Twitter.

Did you enjoy this article? If so, subscribe to YFS Magazine and never miss an update. Don’t forget to make our friendship official and join Young, Fabulous & Self-Employed entrepreneurs on Facebook.

Photo: True Religion

Providing new employees with a concrete employment agreement will help hash out your company’s legal terms and regulations beyond the information discussed in the interview process.

An employment agreement is a signed legal contract between your company and the employee. Every company is different but many companies only provide employment agreements for key employee positions. It is a great idea to have an agreement for all employees in case you run into disagreements or future dilemmas. The terms and conditions of the employment agreement should mirror the statues, qualifications, bylaws, and any shareholder agreements of your business.

Here are five key elements that can help you customize your company’s employee agreement:

1. Basic Information

An employee agreement should always include the date executed, date of employee hire, the full name and position title of the employee, and his or her employers address.

2. Job Responsibilities Overview

In this section, you should write a detailed description of the employee’s full job duties and responsibilities while in the employ of your company. This is the section where any specifics on hours, reporting to a designated place of work, and any office related regulations should be hashed out.

Include the name and job title of the specific person to whom the employee will report with questions or concerns. It is important to clearly spell out all potential employee responsibilities that may arise over time so that if the particular employee doesn’t work out, you will have in writing what was expected of him or her.

3. Compensation

It is very important to be detailed in this section. Include whether you are paying the employee a salary or hourly wage and if there are possible commissions or bonus programs. State how often the person will be paid and when employee reviews will be conducted.

If an employee can earn income in additional ways, clearly define those details in this section. Explain how the commission and bonus programs will be calculated and included in paychecks so the employee is clear on how he or she will be paid. Also, include details on how the employee may receive a pay raise depending on your company regulations. Details about any cost of living increase should be included in this section.

4. Benefits

A comprehensive overview of benefits should be included in this section. Health insurance, vacation time, personal days, sick days, and retirement plans constitute benefits, as well as any other perks for working at your company.

Offer a detailed explanation of when and how employees become eligible for certain benefits and what the employee’s and company’s monetary contributions to these specific benefits are. Details about health insurance and retirement plans will be offered by the specific provider in an informational packet, so do not include that information in this section.

5. Termination

This section should provide a detailed explanation of certain circumstances in which an employee can be terminated and what the termination procedure includes. Outline specific written and verbal warning systems and your company’s termination policy. Include your responsibilities as well as your employee’s responsibilities if the specific person isn’t meeting your requirements stated in the job duties section of the agreement.

Connect with E.J. on Twitter.

Did you enjoy this article? If so, subscribe to YFS Magazine and never miss an update. Don’t forget to make our friendship official and join Young, Fabulous & Self-Employed entrepreneurs on Facebook.

Photo: Vanishing Elephant

E.J. Dealy is CEO of The Company Corporation, which provides affordable incorporation services to small businesses and entrepreneurs nationwide, including Delaware, Florida, and California. The Company Corporation does not provide legal, financial, or tax advice.

Launching a tech company and keeping it afloat in today’s hyper-competitive global market is like building a rowboat in the middle of the rollicking ocean. Trying to save a tech company that is flailing or failing, is even more difficult. “Impossible,” many would say.

Perhaps Yahoo!’s ship is salvageable, but not if its engineers and mechanics work apart. The problems they’ll encounter are unique. Virtual meetings with headsets and PowerPoint slides will be of little use. What IMs and online chats won’t do is lead to the type of casual discourse that enables the birth of truly creative solutions – and Yahoo! needs a lot of creative solutions right now.

As Mayer puts it, “Some of the best decisions and insights come from hallway and cafeteria discussions, meeting new people, and impromptu team meetings.” In other words, bringing people together in the same space allows happy accidents of innovation – or “serendipity.”

“Why can’t we all just meet in person a few times a month?” ask the critics.

Occasional “brainstorming” sessions don’t cut it. Steven Johnson, the best-selling author and Internet guru known for his explorations of the intersection of science, history, technology, and culture, backs this up in his seminal work, Where Good Ideas Come From: “One trouble with brainstorming is that it is finite in both time and space: a group gathers for an hour in a room, or for a daylong corporate retreat, they toss out a bunch of crazy ideas, and then the meeting disperses…too often the relevant hunches aren’t in sync with one another.” Or as organizational consultants Dave Allen and Matt Kingdon put it in the digital magazine, Think Quarterly, “Innovation is a contact sport.”

So when it comes to the ultra-challenging situation of a bloated, failing tech company, turn to the source of innovation – that thing that happens when people with unique and non-replicable brains come together (not apart) in random ways and figure out a problem. Those eureka moments are hard to force, but setting up the right environment can help coax them out. When they happen, they’re magical.

And if Yahoo! can be saved as a result? That will be pretty magical too.

Connect with Brad on Twitter.

Did you enjoy this article? If so, subscribe to YFS Magazine and never miss an update. Don’t forget to make our friendship official and join Young, Fabulous, and Self-Employed entrepreneurs on Facebook.

Photo: Anthropologie

Brad Hoover joined Grammarly as CEO in 2011, with the goal of improving communication among the world’s 2 billion English writers. Connect with Brad, the Grammarly team, and more than 575,000 Grammarly Facebook fans here.

However, does this mean that smaller companies without a Zappos-sized budget are doomed to less satisfied employees? Not exactly.

Employee happiness isn’t just about the stuff you can offer. A competitive salary and gym membership are important, but they are utterly meaningless if employees hate the person they work for or feel as though they are stuck on a dead-end path with limited career growth.

So, if you want to increase employee happiness and cultivate a harmonious workplace here are five simple, and budget-friendly, ways to do it:

1. Focus on growth.

Sometimes it seems like Starbucks baristas gets more on-the-job training than a new hire at a startup. Great employees want to grow, develop, and be challenged. That is why it’s important to create a true learning environment.

While this means that your small business may need to make funding available for training and development, there are other budget-friendly ways to build an engaging and challenging environment. For example, support hack-offs and extra-curricular projects. Encourage committees that tackle issues that matter most to your employees. Lastly, provide developmental assignments that teach new skills and foster career growth and track changes.

2. Encourage social activities.

While extracurricular activities like free breakfasts and staff parties cost money, there are countless things you can do that won’t cost your company a penny. Be creative. Host off-site poker games, karaoke nights, and weekly employee-led yoga classes to cultivate a fun and healthy environment.

Given that we spend so much of our waking hours in the workplace, it is not enough that employees respect and trust one another; true employee engagement comes when colleagues seek out one another to spend time outside of office hours.

Employers can support extracurricular activities amongst employees by making matching funding available (e.g. for food and beverages), or by linking financial support to surpassing budgeted financial goals.

3. Be transparent.

Employees value transparency; this is particularly true with the millennial generation, but applies to all generations in the workplace.

For a healthy culture to form, you should be honest and open from the top down, even when it means sharing traditionally sensitive topics such as company financials and compensation details.

While only a small subset of organizations are willing to peel back the covers on such details, at FreshBooks we recently shared the mechanics of our yearly compensation and review process — and we intend to do so going forward.

Offering transparency on compensation engages employees and empowers their decision-making, so it is clear that there are no hidden agendas or backroom deals.

When you first recognize a problem or issue with your employees, sharing feedback is the clearest and quickest way to encourage a positive change in behavior. Sharing constructive, results-oriented feedback is beneficial because it helps employees focus on the key areas they need to work on. Additionally, many people can be motivated and inspired by well-delivered feedback, causing them to perform at a higher levels. 

Here is a five-step model to get started:

1. Ask for permission.

You would be surprised how much of a difference a simple courtesy, such as asking for permission, can make when you give informal performance evaluations. A simple “Hey, do you have a minute for some quick feedback?” can help the receiver become mentally ready for it, be it positive or negative.

2. State what you observed.

Where possible, use specific examples and avoid being judgmental. Saying to an employee, “You don’t give off a lot of energy in meetings” is not as helpful as saying, “In the meeting with Tina yesterday, I noticed your body language was rather passive.”

3. Explain the impact.

Point out the direct impact that resulted from their behavior, and again be as specific as possible. For example, saying, “When you called the meeting to an end without leaving time for discussion, it made me feel like you did not value the team’s input” or “I noticed that the clients were upset” is much more effective than “When you don’t leave time for a discussion, you look like a control freak!” Statements positioned as “it made me feel” and “I noticed that” can keep an informal feedback session from evolving into a debate.

4. Pause and listen.

When you have said your peace, stop. Then ask for the other person’s reaction. Give them time to think through what you have said and react to it.

5. Suggest concrete next steps.

After you have shared feedback, suggest a small number of actionable next steps that your employee can take in the future, to change this behavior. Most people will appreciate that you’re giving them the first step to improving the situation.

Whether you need to hire a web design company for your company’s rebranding efforts or ramp up on sales staff by hiring an independent sales consultancy, partnering with vendors is status quo.

So much so that your initial interactions with a rogue outsourcing vendor can follow (more or less) the same route as discussions with a more reputable service provider. Calls and emails are promptly answered, the pilot project goes off like a dream, the overseas virtual employee you hired converses in English, flawlessly. Everything is seamless.

However, let’s fast forward to a few weeks down the line.

Something is definitely wrong and looks to be getting worse as the days progress. The work output isn’t coming along as smoothly as it was promised. The cheery-voiced, helpful project coordinator seems to have morphed into a rather surly and evasive entity, who doesn’t call back as promised. New (and much higher) service rates are suddenly replacing the older agreed-upon pricing and the delivery dates are continuously pushed beyond initial deadlines.

At this point, alarm bells have begun to ring, but you can’t afford to pull put since you have already invested quite a bit of time and resources into working with your new vendor. Most importantly, you cannot afford to miss your go-to-market deadline.

It is at this point that most small businesses are hopeful, choking and panicking — all at the same time. Hiring the wrong vendor is like having a fish bone stuck in your throat – you can’t swallow and you can’t spit it out.

Sounds scary, doesn’t it?

This is merely an example of what can happen if you partner up with a rogue outsourcing company and fail to pay attention to the early red flags. But foresight is better than hindsight and there are at least 5 warning signs that can help you separate rogue vendors from reliable ones. For example, the vendor:

1. Makes tall and unbelievable promises.

You have contacted several web design and development consultants and a majority of them indicated that your eCommerce website would take a minimum of two months to be completed. Eager to save costs and enhance efficiency, you decide to outsource the entire project to one of them.

The outsourcing company you hired then blithely informs you of even better news — your eCommerce site will be ready in a month’s time. But, if your gut reaction is “this is too good to be true,” then it probably is! Make sure that the service provider’s commitments to deadlines are realistic and not merely a bait to trap you and ultimately deliver sub-standard, or worse, no work at all.

2. Does not have a verifiable office (mailing) address and up-to-date contact information.

Professional vendors will have (at least) a domain-linked email address (e.g. john.doe@mydomain.com), a telephone number, other forms of contact (Skype) and a robust social media presence (e.g. Facebook, Twitter, LinkedIn, Google+, etc). When such obvious and commonly used contact points are absent, it is wise to question the reliability and authenticity of such a vendor.