INDEPENDENT CONTRACTOR VS. EMPLOYEE CLASSIFICATION
Kelsie A. Kirkham
Parsons Behle & Latimer Legal Briefings
A company may pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. By engaging independent contractors instead of employees, companies can benefit from considerable cost savings and increased workforce flexibility, while also avoiding significant wage, tax and other obligations.
An independent contractor is a worker who contracts with individuals or entities to provide services in exchange for compensation. An entity contracting with an independent contractor generally has the right to control only the result of the project, not how the project is accomplished. An independent contractor typically:
- Charges fees for service
- Is engaged only for the term required to perform an identified service or task
- Retains control over the method and manner of work
- Retains economic independence
- Is responsible for paying their income, social security and Medicare taxes
- Is not eligible for company-provided benefits
- Is not protected by most federal, state or local laws intended to protect employees
An employee is subject to significant oversight by a company including the right to control the method and manner of the employee’s work. In addition, an employee:
- Is paid wages (which may include overtime compensation) and benefits
- Is employed for a continuous period and performs whatever tasks the company requires
- Pays the full amount of their income taxes and a portion of their social security and Medicare taxes, generally through the amounts their employer is obligated to withhold from their wages
- Is economically dependent on the employer
- Is protected by applicable federal, state and local employment laws
These general rules and comparisons are what protect employees and contractors differently by law. Various federal, state and local employment laws, including laws governing health and safety, wage and hour and equal employment standards, protect employees but not independent contractors.
However, companies cannot rely on generalizations to determine employee or independent contractor status. Independent contractor classification involves careful consideration of several factors, application of multiple standards and exposure to liability in several areas. For example, the test to determine independent contractor status under federal tax law is not the same test as that applied under the Federal Labor Standards Act. Different tests and interpretations can mean:
- A worker is an independent contractor for some purposes and an employee for others (such as under state versus federal law)
- A worker who provides two different services to the employer is an employee for one and an independent contractor for the other, e.g. an employee working in the company's shipping department is also a freelance graphic designer who occasionally provides graphic design services to the company as an independent contractor
- Courts applying the same test to the same position may arrive at different results
The tests for independent contractor or employee status often share some common characteristics. For example, most tests:
- Involve an analysis of the same or similar factors
- Are a balancing test, and no single factor is determinative
- Analyze the degree of control the company exerts over the manner and means by which the worker accomplishes the work
- Afford little weight to the parties’ characterization of the relationship, including in any written agreement
The consequences of misclassifying individuals as independent contractors can be serious. Because an independent contractor avoids many requirements of an employment relationship, independent contractor status is often construed narrowly, and large penalties may be imposed for improper classification.
To discuss this or other employment-related matters, send an email to Kelsie Kirkham at firstname.lastname@example.org or call (208) 522-6700.