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Contractor Pathway to Employee-Ownership — Lantern ​

Effective Date: 2026-01-09
Status: Constitutional Document (requires 75% employee vote to amend)

Purpose ​

This document clarifies the distinction between contractors and employees, and defines the pathway for contractors to become employee-owners if appropriate.

Core Principle: Clear Boundaries ​

Contractors provide services. Employees build the company.

Contractors are valuable contributors, but they are not employee-owners until formally hired as employees. This distinction protects both parties:

  • Protects contractors: Clear scope, no unexpected obligations
  • Protects company: Maintains employee-ownership structure, prevents accidental equity dilution

Contractor (1099 / Independent Contractor) ​

Legal status: Self-employed individual or business providing services under contract

Characteristics:

  • Sets own hours and methods
  • Provides services to multiple clients (not exclusive to Lantern)
  • Provides own tools and equipment
  • Paid per project or hourly rate (no salary, no benefits)
  • Issues invoices; receives 1099 (US) or equivalent
  • No voting rights, no governance participation, no employee benefits

Examples at Lantern:

  • Freelance designer for specific project
  • Copywriter for marketing content
  • Legal counsel for specific matters
  • Accountant/bookkeeper for monthly financials
  • Developer for time-bound feature implementation

Employee (W-2 Employee-Owner) ​

Legal status: Employee of Lantern with employee-owner status

Characteristics:

  • Works specified hours for Lantern (full-time or part-time)
  • Exclusive to Lantern during working hours (no competing work)
  • Uses company-provided tools and equipment
  • Receives salary + benefits + profit sharing
  • Subject to employment laws and company policies
  • Has voting rights and governance participation
  • Becomes employee-owner (receives ownership stake per Employee Rights Charter)

Examples at Lantern:

  • Software engineers
  • Product managers
  • Operations staff
  • Customer support
  • Marketing team members

Why the Distinction Matters ​

Misclassifying employees as contractors is illegal and can result in:

  • Back taxes and penalties (employer payroll taxes)
  • Fines from labor departments
  • Lawsuits from misclassified workers
  • Loss of worker protections (contractors cannot claim wrongful termination, unemployment, etc.)

IRS/Legal Tests:

  • Behavioral control: Does Lantern control how work is done? → Employee
  • Financial control: Does Lantern control payment and expenses? → Employee
  • Relationship type: Is this ongoing, indefinite relationship? → Employee

Governance Protection ​

Contractors cannot have voting rights because:

  • They are not employees under law
  • They do not have long-term commitment to company
  • Granting them governance power would violate employee-ownership structure
  • They may have conflicts of interest (working for competitors)

Equity Protection ​

Contractors cannot receive equity because:

  • Equity is reserved for employee-owners only (per governance documents)
  • Contractors have no legal obligation to stay with company
  • Diluting ownership to contractors violates worker cooperative principles

Contractor Ratio Protection (Anti-Abuse) ​

Contractors cannot exceed 30% of total workforce to prevent governance bypass:

  • Rule: Contractors ÷ (Employees + Contractors) ≤ 30% (absolute maximum, zero exceptions)
  • Example: 10 employees can have max ~4 contractors (30% ratio); cannot have 10 employees + 6+ contractors
  • Reasoning: Prevents abuse where leadership hires more contractors than employees to bypass employee governance mechanisms
  • Why it matters:
    • Contractors have no voting rights
    • Excessive contractor use dilutes employee decision-making power
    • Ensures super-majority (70%+) of workforce are employee-owners with governance rights
  • Employee vote required for ANY contractor hiring:
    • Small contracts (<$5K, <1 month): Delegated authority with transparency
    • Medium contracts ($5K-$25K, 1-3 months): Majority employee vote
    • Large contracts (>$25K, >3 months): 75% supermajority vote
  • Quarterly monitoring: Finance/operations reviews contractor ratio every quarter
  • Enforcement: If ratio exceeds 30%, company must immediately:
    1. Convert contractors to employees (preferred)
    2. Reduce contractor headcount
    3. Hire more employees to restore ratio within 60 days
  • Zero tolerance: No exceptions—30% is absolute constitutional maximum
  • Anti-abuse: All contractor engagements logged publicly, independent review available, whistleblower protection
  • See: Anti-Greed Safeguards #11 for full details

Contractor Engagement Policy ​

When to Hire a Contractor ​

✅ Use contractors for:

  • Specialized short-term projects (e.g., logo design, website copywriting)
  • Expertise not needed full-time (e.g., legal, accounting, tax)
  • Peak capacity needs (e.g., seasonal customer support overflow)
  • Testing a new role before committing to full-time hire
  • Skills not available internally and not strategic to build in-house

❌ Do NOT use contractors for:

  • Core product development (use employees)
  • Ongoing operational roles (use employees)
  • Strategic decision-making (employees only)
  • Roles requiring deep knowledge of company culture/mission
  • Work requiring access to sensitive company information or user data

Contractor Engagement Process ​

  1. Define scope: Clear statement of work (SOW), deliverables, timeline, budget
  2. Employee approval (REQUIRED for all contractors):
    • Small contracts (<$5,000 or <1 month): Delegated authority (CEO/designated role) BUT must be logged publicly within 48 hours for transparency
    • Medium contracts ($5,000-$25,000 or 1-3 months): Requires majority employee vote (>50%)
    • Large contracts (>$25,000 or >3 months): Requires 75% employee supermajority vote
    • Ratio check: All proposals must confirm current ratio is <30% and hire won't exceed 30%
  3. Contract agreement: Written contract with scope, payment terms, termination clause, no voting rights clause
  4. Access controls: Limit contractor access to only what's needed (no employee-only systems)
  5. IP assignment: All work product owned by Lantern (standard in contract)
  6. Transparency logging: All contractor engagements logged in shared system within 48 hours (name, scope, cost, duration, ratio impact)
  7. Review & payment: Work reviewed by employee; invoices paid per contract terms
  8. Offboarding: Access revoked immediately upon contract completion; final report to employees on outcome

Contractor Rights (Limited) ​

✅ Contractors have right to:

  • Fair payment per contract terms
  • Safe working conditions (if on-site)
  • Respect and professional treatment
  • Clear expectations and feedback
  • Timely payment (net-30 or as agreed)

❌ Contractors do NOT have:

  • Voting rights or governance participation
  • Employee benefits (health insurance, PTO, profit sharing)
  • Access to employee-only meetings or financial information
  • Job security or protection from contract termination
  • Claim to ownership or equity

Pathway: Contractor → Employee-Owner ​

When It Makes Sense ​

Consider converting a contractor to employee when:

  • Work has become ongoing (>6 months of continuous work)
  • Role is strategic/core to company mission
  • Contractor expresses interest in full-time employment
  • Company needs this expertise permanently
  • Contractor aligns with company values and culture

Conversion Process (5 Steps) ​

Step 1: Employee Discussion & Approval ​

  • Current employees discuss: Should this role be permanent?
  • If yes, employees vote (majority required) to open employee position
  • Contractor is informed that role may transition to employee position

Step 2: Contractor Interest & Eligibility ​

  • Contractor confirms interest in becoming employee
  • Contractor meets basic eligibility:
    • Legally eligible to work in relevant jurisdiction
    • Willing to work exclusively for Lantern (no competing clients)
    • Aligned with company mission and values
    • Passes background check (if required)
  • 30–90 day trial period as full-time employee (W-2)
  • Employee benefits start immediately
  • No voting rights or profit sharing during trial (not yet employee-owner)
  • Trial allows both parties to confirm fit

Step 4: Employee-Owner Onboarding ​

  • Upon successful trial (or immediately if no trial), contractor becomes employee-owner
  • Granted full employee rights per Employee Rights Charter:
    • Voting rights (one person, one vote)
    • Profit sharing (equal distribution)
    • Benefits (health insurance, PTO, etc.)
    • Governance participation
  • Employee-owner status is irrevocable during employment (can only be removed via termination)

Step 5: Contract Termination ​

  • Original contractor agreement formally terminated
  • Transition to employee agreement (offer letter, employment contract)
  • All outstanding contractor invoices paid in full
  • New compensation as employee (salary, not hourly contractor rate)

Conversion Vote Requirements ​

ScenarioVote Required
Convert contractor to trial employee (no ownership yet)Majority (>50%)
Grant employee-owner status after trialMajority (>50%)
Convert contractor directly to employee-owner (skip trial)75% supermajority

Rationale: Direct conversion to employee-owner is higher bar because it grants immediate voting rights and profit sharing.

Long-Term Contractor Relationships ​

What if Contractor Works for Lantern for Years? ​

They remain a contractor unless formally converted to employee.

Key points:

  • Time alone does not grant employee status (legal and governance requirement)
  • Long-term contractors are valuable partners, but they do not automatically become employees
  • If relationship becomes employee-like (ongoing, exclusive, controlled), conversion is legally required to avoid misclassification
  • Employees vote annually to review long-term contractor relationships (6+ months continuous) and decide if conversion is appropriate

Red Flags for Misclassification ​

Watch for these signs that contractor should be converted to employee: 🚩 Contractor works full-time hours exclusively for Lantern
🚩 Contractor receives detailed instructions on how to do work (not just what to deliver)
🚩 Contractor uses only Lantern-provided tools/equipment
🚩 Contractor attends all team meetings and participates like employee
🚩 Contractor relationship is indefinite (no clear end date or project)

Action: If 3+ red flags present, consult legal counsel and consider conversion to employee.

Contractor Restrictions (Governance) ​

What Contractors CANNOT Do ​

❌ Vote on any company decisions
❌ Attend employee-only governance meetings
❌ Access employee-only financial information (P&L, salaries, profit distribution)
❌ Receive equity or ownership stake
❌ Participate in profit sharing
❌ Make decisions on hiring, strategy, or operations
❌ Represent Lantern in legal/official capacity (unless specifically authorized)

What Contractors CAN Do (If Invited) ​

✅ Provide expert advice when requested
✅ Attend specific meetings related to their project (not governance)
✅ Collaborate with employees on deliverables
✅ Suggest improvements within scope of their work
✅ Invoice for work completed per contract

Contractor Compensation ​

Payment Structure ​

  • Hourly rate or fixed project fee (not salary)
  • Payment via invoice (net-30 or as agreed in contract)
  • No benefits, no profit sharing, no equity
  • No overtime pay (contractors set own hours)

Rate Guidelines ​

  • Market rate for expertise and geography
  • Typically 1.5–2× equivalent employee hourly rate (because contractors have no benefits, pay own taxes, assume business risk)
  • Example: If employee developer earns 75,000/year (~$36/hour), contractor developer may charge $60–$80/hour

Tax Treatment (US) ​

  • Contractors receive 1099-NEC (not W-2)
  • Contractors responsible for own taxes (self-employment tax, income tax)
  • Lantern does NOT withhold taxes for contractors
  • Contractors should receive 1099 by January 31 following tax year

Employee Protections (When Working with Contractors) ​

Employees Retain Decision-Making Power ​

  • Employees manage contractors, not vice versa
  • Contractors execute work per employee direction
  • Employees have final say on accepting/rejecting contractor deliverables
  • Contractors cannot override employee decisions

Employees Control Access ​

  • Employees decide what information contractors can access
  • Contractors have limited system access (only what's needed)
  • Employees can revoke contractor access at any time

Employees Approve Contractor Budgets ​

  • Contractor spending must fit within employee-approved budgets
  • Large contractor agreements (>$10,000 or >3 months) require employee vote
  • Employees can terminate contractor relationships via majority vote

Special Cases ​

Case 1: Contractor Who Used to Be Employee ​

Question: Former employee wants to return as contractor. Allowed?

Answer: Yes, but they are treated as contractor (no voting, no benefits) unless re-hired as employee.

  • Former employee-owners forfeit ownership when leaving (buyback per Employee Rights Charter)
  • To regain employee-owner status, they must go through full conversion process
  • No special treatment for former employees

Case 2: Founder Who Starts as Contractor ​

Question: Can founders start as contractors before formalizing employment?

Answer: Yes, but they should convert to employee-owner ASAP.

  • Founders should be employees and owners, not contractors
  • If bootstrapping initially, founders can contractor for first 1–3 months
  • Once company formalizes (incorporation, first revenue, etc.), founders become employees
  • Delaying conversion creates governance ambiguity

Case 3: Part-Time Contractors ​

Question: Can contractors work part-time indefinitely?

Answer: Yes, if truly contractor relationship (multiple clients, project-based).

  • Part-time ≠ contractor (can have part-time employees)
  • If contractor works regular schedule exclusively for Lantern, they should be part-time employee
  • Part-time employees are employee-owners (same voting rights, prorated benefits/profit sharing)

Case 4: International Contractors ​

Question: How to handle contractors in other countries?

Answer: Follow local labor laws; conversion may require international employment infrastructure.

  • Use international contractor agreements compliant with local laws
  • If long-term, consider:
    • International employee status (via Employer of Record service)
    • Local subsidiary (for multiple employees in same country)
    • Remote employee status (if legal in jurisdiction)
  • International employees are employee-owners (same rights as US employees)

Enforcement ​

Monitoring for Misclassification ​

  • Finance/operations reviews contractor relationships quarterly
  • Red flag report: Any contractor working >6 months continuously
  • Legal counsel reviews contractor classifications annually
  • Employees vote on flagged relationships (convert to employee or terminate contract)

Violations ​

If contractor improperly classified:

  1. Immediate legal review to assess risk
  2. Options:
    • Convert to employee retroactively (preferred)
    • Terminate relationship and re-engage properly
    • Reclassify and pay back taxes/penalties if required
  3. Process improvement to prevent future misclassification

If contractor demands voting rights or equity:

  1. Clarify contractor status per this document
  2. Offer conversion to employee if appropriate
  3. If contractor refuses to accept limits, terminate contract

Summary Table: Contractor vs. Employee-Owner ​

AspectContractor (1099)Employee-Owner (W-2)
Legal statusSelf-employedEmployee
Voting rightsNoYes (one person, one vote)
Profit sharingNoYes (equal distribution)
BenefitsNoYes (health, PTO, etc.)
SalaryNo (invoiced hourly/project)Yes (annual salary)
TaxesSelf-employed tax (contractor pays)Employer withholds taxes
Job securityContract term onlyEmployment protections (no layoffs without vote)
OwnershipNo equityEmployee-owner status (ownership stake)
GovernanceNo participationFull participation (meetings, votes)
DurationDefined project/termIndefinite (at-will or contract)
ControlSets own methodsCompany directs work

FAQs ​

Q: Can a contractor vote if they've worked with us for 2 years?
A: No. Time does not grant voting rights. Contractors must be converted to employee-owners to vote.

Q: Can we give a contractor a small equity stake as a bonus?
A: No. Equity is reserved for employee-owners only per governance documents.

Q: What if a contractor is offended by not having voting rights?
A: Explain the legal and governance reasons. Offer conversion to employee if role is strategic and long-term. If contractor insists on voting without employment, terminate relationship (governance violation).

Q: Can contractors attend company retreats or social events?
A: Yes, if invited (optional). But they cannot attend governance meetings or vote.

Q: What if we can't afford to hire someone as employee but need ongoing work?
A: Consider:

  • Part-time employee (employee-owner with prorated benefits)
  • Contractor for defined project (not indefinite)
  • Delay hiring until revenue supports full-time employee
  • DO NOT misclassify as contractor to save money (illegal)

Q: Can a contractor propose becoming an employee?
A: Yes. They can express interest. Employees vote whether to open position and proceed with conversion.

This document provides guidance on contractor vs. employee classification. It is not legal advice.

Consult legal counsel to:

  • Draft compliant contractor agreements
  • Classify workers properly under local labor laws
  • Navigate international employment regulations
  • Ensure compliance with tax laws (IRS in US, HMRC in UK, etc.)

Misclassification can result in penalties, back taxes, and legal liability. When in doubt, consult an employment attorney.

Amendment Process ​

This framework is a constitutional document:

  • Requires 75% employee-owner vote to amend
  • Annual review during employee governance meeting
  • Amendments proposed with 30-day review period
  • Anonymous voting required

Final Note: Contractors are valuable partners, but they are not employees or owners. Clear boundaries protect everyone and ensure legal compliance while preserving employee-ownership governance.

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