How do I give a bonus/commission/incentive to a 1099 contractor?

March 23, 2010 11:51 AM

How do I give an incentive requiring an independent contractor to meet certain goals without creating an employer/employee relationship?

I use independent contractors (ICs) for programming tasks. I want the tasks done a certain way (i.e. they report their time using a web application of my choosing, they finish the task in a timely manner [decided by me], they give good feedback, they comment their code, etc...).

In order to encourage my ICs to meet these objectives, I would like to offer a 5% incentive when they meet them. I am concerned that laying out these 'requirements' will create an employer/employee relationship, since I am dictating how the work is to be done.

I really just want to have my ICs meet these goals, but I don't want to be a tyrant - that's why I want to incentivise this program, to make them want to meet these goals.

Is there any way I can do this without causing myself a big legal headache later on if one of these ICs wants to claim in court that I am their employer? Are these objectives better off written into the contract with my ICs?

What should I be careful of?

posted by farmersckn to law & government (5 answers total)

If you're concerned about a big legal headache down the road, you should speak with a tax professional or attorney now.
posted by sanko at 11:54 AM on March 23, 2010

IANAL, TINLA. But I've heard that contractors that do road construction jobs for the state [of Michigan] have bonuses for early completion written into their contracts, so I imagine it's at least possible to do this legally (in Michigan).

My company also has a sort of "bonus" plan in our contract with one of our clients. It's actually called the "discount recovery plan", and it entitles us to reduce a discount in our fees to our client, provided we meet certain milestone goals (essentially a bonus for timely completion).
posted by Vorteks at 12:16 PM on March 23, 2010

What should I be careful of?

You should be careful of taking legal advice from folks on AskMe. Spend an hour with a business lawyer in your jurisdiction and save yourself a bunch of trouble down the road.
posted by toomuchpete at 12:54 PM on March 23, 2010

Just write that into the contract, and pay better rather than doing bonuses?

"I only pay invoices submitted through XYZ"

"Code is expected to be well documented, both with in-code comments, and out-of-code overviews"

The time one is often done by having an hourly rate and a target. Then they get some percentage of the difference between actual and target. So if they go over, they give up hourly rate, if the come in under, they don't throw away the hours they could have "padded". Ie, set target at 10, they finish at 7. They get the equivalent of 8.5 hours of pay.
posted by cschneid at 3:42 PM on March 23, 2010

First, thank you for thinking of this, instead of just throwing things at the contractor and seeing what will stick!

In the engineering world, the contract might be a cost-plus incentive contract or cost-plus award contract. These are the types of contracts that I believe Vortecks is referring to, although keep in mind those are contracts with large EPCM (engineering, procurement, construction, and maintenance) companies, not usually one-man sole proprietorships. If I were you, I'd ask a professional (lawyer, CPA) how one of these contracts might work for your situation.

If you look at this book (Pricing and Cost Accounting), in the "Incentives Contract" section starting on Page 18, you can see a pretty good description of other types of incentive contracts.
posted by Houstonian at 6:25 PM on March 23, 2010