Topic of the Week Worker Classification: Independent Contractor or Employee
- What's the difference between being an independent contractor and an employee?
- Can employers just decide that I'm an independent contractor so that they don't have to pay my taxes, wages, and benefits?
- What factors are important to the Department of Labor in determining my status?
What's the difference between being an independent contractor and an employee?
If you are considered a contractor, you may not have the same legal rights as an employee. For example, most federal laws that prohibit discrimination only apply to employees. Another example: an employer is required to pay its hourly employees minimum wages and overtime wages, but contractors don't have to be paid any specific amount. Employers that provide benefits to employees do not have to provide those benefits to contractors. An employer is required to deduct payroll taxes from the pay of an employee. No payroll taxes are deducted from money paid to a contractor.
A new category of independent contractors is called “on-demand” workers which are employees that work for online app-based companies that are gaining revenue and profits from these workers. An example of an “on-demand” worker is an Uber driver. In this field of employment, employers have faced criticism for their treatment of these “on-demand” workers; however, employers defend on the grounds that labor regulation will crush the innovation they seek to advance. Employers of “on-demand” workers further argue that they are not employers and these workers are not employees; however, critics of this arrangement now argue that these types of companies are performing a labor-brokering function. Thus, legislation is being developed to determine these workers’ rights on the job such as minimum wage for all hours worked, right to a voice on the job, social insurance programs, and many other benefits and protections a normal employee would obtain. Please check back for any developments surrounding the rights of “on-demand” workers.
Both the IRS and the DOL care about whether you are properly classified. Each of these agencies has guidelines to help you decide whether you should be paid as an employee or as an independent contractor.
Can employers just decide that I'm an independent contractor so that they don't have to pay my taxes, wages, and benefits?
There is no single rule or test that determines whether you are an independent contractor vs. an employee. It is the particular facts of a situation that control. However, both the IRS and the DOL have developed guidelines to help both businesses and workers choose the correct status.
What factors are important to the Department of Labor in determining my status?
The Department of Labor states that “economic realities” factors are helpful guides to determine whether a worker is an employee or an independent contractor. While there is no single rule or test, the Supreme Court has held that it is the totality of the working relationship between the worker and employer that is determinative.
Although the factors considered can vary, the factors generally considered to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA) include:
The extent to which the work performed is an integral part of the employer's business. If your duties are an integral part of the business, that fact leans toward finding you to be an employee. If your duties are not central to the primary business, that fact leans toward finding you to be a contractor.
Whether the worker's managerial skills affect his or her opportunity for profit or loss. Managerial skill may be indicated by the hiring and supervision of workers or by investment in equipment. Analysis of this factor should focus on whether the worker exercises managerial skills and, if so, whether those skills affect that worker's opportunity for both profit and loss. An employee usually has a set wage and only shares in the profits or losses of the business under a shareholder agreement or benefit program. A contractor can be more profitable by performing their services more efficiently. The profits and losses of a contractor are not linked to the profits and losses of the business that is using your services.
The relative investments in facilities and equipment by the worker and the employer. The worker must make some investment compared to the employer's investment, and bear some risk for a loss, in order for there to be an indication that he/she is an independent contractor in business for himself or herself. A worker's investment in tools and equipment to perform the work does not necessarily indicate independent contractor status, because such tools and equipment may simply be required to perform the work for the employer. If a worker's business investment compares favorably enough to the employer's that they appear to be sharing the risk of loss, this factor indicates that the worker may be an independent contractor.
The worker's skill and initiative. As a contractor, you are free to exercise your own initiative and judgment. You can take advantage of open market competition to set your prices and pick your work. The employee is required to follow directions from the employer and under normal circumstances cannot compete with the employer.
The permanency of the worker's relationship with the employer. More permanent relationships create an employee-employer relationship. Temporary services are more likely to create a contractual relationship.
The nature and degree of control by the employer. The more control the business has over the work you do, the more likely you are to be an employee. If you are free to perform your services without detailed direction or supervision, you are more likely to be a contractor.