Employee or Independent Contractor? Knowing The Difference is Critical!

Businesses can hire employees, independent contractors, or both. Although employees and independent contractors both perform work for the employer, there are important legal differences between the two. For employees, the employer must withhold income tax, Social Security, and Medicare from the wages. This is not the case for independent contractors - they are responsible for paying their own taxes. In addition, independent contractors do not enjoy the protections of federal and state employment and labor laws. For example, they are not entitled to overtime as required by the FLSA and they are responsible for getting their own Workers’ Compensation insurance.

Because independent contractors lack many of the legal protections afforded to employees, federal and state law establishes criteria that must be met to consider a worker an independent contractor. These tests generally look at three areas: behavioral control of the worker, financial control of the worker, and the type of relationship the organization has with the worker.

Under behavioral control, a court will look at the type in instruction given to the worker. If the worker is told exactly where and when to work, given specific training on how to do the job, or put though job evaluation systems, then it is likely that they will be considered an employee. Under financial control, a court will look at what the pay structure for the worker is like. If a worker is paid by the hour, expected to exclusively work for the employer, has their tools paid for by the employer, or is expected to work for the employer for an indefinite period of time, then they are likely an employee. On the other hand, if the worker is paid by the project, takes projects from other employers, and brings their own tools then they are likely an independent contractor. When looking at the relationship between the employer and the worker, courts will consider how the two parties perceive the labor being done. If a worker’s labor is the type of labor that is a regular part of the company, done on an indefinite basis, or has benefits such as insurance, then the worker is likely an employee.

If an organization has been treating its workers as independent contractors when they are actually employees, the business can be found liable for significant damages. This is called worker “misclassification” and may result in payments for overdue insurance premiums ant taxes, unpaid overtime wages, and steep penalties and fines.

If you have questions about the proper classification of workers, feel free to reach out to Employer-Lawyer at (801) 874-4964.