What Are the Key Differences between Independent Contractors and Employees?

If you run a business, you may have many employees and you may also have independent contractors. Sometimes, you may even have both groups of people performing services that are somewhat similar. Legally, however, there are important differences between the two. As an employer and business owner, and as an employee or independent contractor, it can be helpful and important to understand these distinctions and the impact that they have.

In a nutshell, an independent contractor is someone who independently runs his or her own business, but performs services for another business at the request of that business. Often, an independent contractor is retained in connection with a specific project or task, but not for ongoing and continual employment. An employee, by contrast, is hired by a company to perform specific work at the employer’s direction and is paid directly by the employer for those services – usually on a long-term basis.

Taxes and Legal Benefits

One key difference between independent contractors and employees concerns the manner in which taxes are paid and by whom. For employees, companies typically withhold income tax, Social Security, and Medicare from the wages that are paid. For the independent contractor, the company does not do so, and the independent contractor is responsible for doing that on his or her own. Additionally, from a legal perspective, employees are typically covered by a variety of federal and state employment and labor laws, to which independent contractors are not subject.

Workers’ Compensation

Typically, state and federal laws require that an employer provide workers’ compensation coverage for their employees. Usually, the purchase of workers’ compensation coverage by the employer benefits both the employer and the employee in that the employee is covered for medical bills, lost wages, and other damages incurred as a result of injuries that happen during their employment. However, the employee is also prevented from directly suing their employer for a work-related injury or illness.

By contrast, an employer is usually not required, by either federal or state law, to provide workers’ compensation coverage for an independent contractor. This means that, if an independent contractor is injured on the job through any fault of the employer, they could, in theory, file suit against the employer to recover damages. Though it is not required, in some instances, employers do seek to hire independent contractors who have their own workers’ compensation coverage. Depending upon the risks of the particular job involved, the contracting company may decide that the potential cost of a lawsuit is simply not worth the risk of hiring an independent contractor without workers’ compensation coverage.

Keeping that in mind, many independent contractors do consider and ultimately decide to purchase workers’ compensation insurance, finding that the cost is worth the additional work they are likely to receive by being insured. This is particularly true in industries like the construction industry, which carry a higher risk of injury. Doing so is a decision that ultimately pays off for the independent contractor and the employer in the long run.

Method and Time of Payment

If an individual is an employee, federal and state laws require that he or she is placed on a regularly scheduled pay period, which remains the same unless formally changed. While pay periods can vary from one week to one month, they must nevertheless be routine and occur as regularly scheduled. Moreover, federal and state laws require that an employee be paid on his or her normal pay date or earlier if the paycheck is not negotiable on the normally scheduled pay date – if, for example, that date is a holiday. Employees are typically paid either an hourly rate or by salary.

In contrast to the way employees are required to be paid, independent contractors have more flexibility in payment schedule and structure. A contract entered into with an independent contractor may be for a total lump sum amount that is paid when the job is completed, or for an hourly, daily, or weekly amount that ends on a specific date. The contractor and the employer with whom he or she is contracting have the flexibility to discuss this and determine which option would work best, based on the particular circumstances involved. Typically, contractors send an invoice for the amount due and are paid after the invoice is received. In most business, contractors are not paid by payroll staff.

Still Confused? Ask Yourself ….

If it remains confusing as to whether an employee is an independent contractor or an employee, it can be helpful to ask yourself the following questions:

  •       Does the company control, or have the authority to control, what the worker does and the manner in which the job is performed?
  •       Does the company control the business aspects of the worker’s job (things like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies – the employer or the worker)?
  •       Is there a written contract or employee benefits like a pension plan, insurance, or vacation pay?
  •       Is it an ongoing relationship, beyond simply one project or a few related projects?

If the answer to the foregoing questions is “yes,” it is more likely than not that the worker may be an employee. By contrast, if the worker is hired by the project, receives no benefits or regular salary, is not engaged for ongoing work on an indefinite basis, and provides his or her own tools, supplies, and other materials, it is more likely that the worker may be considered an independent contractor.

 303 Legal for Your Legal Needs

To many people, the law can often be complex and confusing. This is understandable as it can be applied in many different ways, depending upon the circumstances. If you have additional questions related to employee and independent contractor status, or any other questions related to business law for which you need knowledgeable and experienced legal representation, at 303 Legal, we are proud to provide it. We would be honored to have the opportunity to help you. Call us today.