Employees vs. Independent Contractors: What's the Difference?

We’ve talked before about why it’s so important to know the difference between an employee and an independent contractor (and the penalties for getting this wrong). But as I was deciding what this week’s blog post should be, I realized…we didn’t really discuss what is the difference between an employee and an independent contractor? As year-end approaches and you start making strategic plans for next year, it’s critical that you know how to make this determination.

The IRS considers a worker an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” If you think about it, this makes sense. An independent contractor must be “independent.” If you are telling a worker what to do, when to do it, where to do it, and how to do it, they’re not an independent contractor. They’re an employee. Even if the worker has some level of discretion (as most professionals do in this day and age), the key is whether or not you as the employer have the legal right to control what is being done and how it’s being done. In other words, are you paying the worker to accomplish a result, or are you paying the worker to perform a list of duties and responsibilities)?

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Are you paying the worker to accomplish a result or to perform a list of duties and responsibilities?

Of course, like most things in the practice of law, it’s never as simple as results vs details. The IRS is cracking down on misclassification, and with the growth of the so-called gig economy, some states are even passing legislation to treat more workers as employees. The ultimate answer to the question “what’s the difference between an employee and an independent contractor” is it depends on the specific facts in your situation. How’s that for a lawyer answer?

The Factors to Consider

• Are you giving the worker detailed instructions (again, what to do, when and where to do it, how to do it)? The more instruction that you provide the worker, the more likely they are to be considered an employee.
• Are you training the worker? Providing on-the-job training, whether at the start of the job or just periodically, tends to make the worker look like an employee.
• Are you providing tools and equipment to the worker? Independent contractors typically supply their own tools and equipment.
• Are you reimbursing the worker for their expenses? While employees almost always expect to be reimbursed for out of pocket expenses, for independent contractors, this can go either way.
• Can the worker potentially earn a profit or loss on the job? Independent contractors are usually running their own business. As a result, the job they perform for you may or may not be profitable to them.
  
• Can the worker provide the same or similar services to others in the market? For a typical independent contractor, you won’t be their only client or customer. On the other hand, an employee usually only works for one employer at a time (unless, of course, the employee is part-time and working multiple jobs).
  
• Are you paying the worker a regular wage or salary (per hour, per week, or per some other time period)? Employees are usually paid some amount of money for a set amount of time (setting aside commissioned sales reps). Independent contractors are typically paid for completing a set job or project.
  
• Do you have a written contract with the worker? While the contract isn’t the end of the discussion, having one that spells out what relationship the parties intended is a factor to be considered.
• Do you provide typical employment benefits to the worker (i.e., insurance, retirement, vacation or sick pay)? An independent contractor should not be earning employment benefits.
• Are you hiring the worker for an indefinite period of time? If there is no end date in mind, the worker is probably an employee. Independent contractors tend to be paid to complete a specific job, often within a specific time period.
  
• Is the worker performing services that are a key aspect of your business? If the worker’s responsibilities are at the core of the business, they are more likely to be an employee. For example, if this Firm hires an attorney to advise clients, that’s at the core of what we do. That new attorney is going to be considered an employee. But if the Firm hires a marketing guru to manage this website, that would be an ancillary service. That worker would likely be an independent contractor.
  

So when deciding whether or not a new worker is an employee or an independent contractor, you really do have to consider all of the facts and circumstances to determine which role seems to fit better. Given the penalties for getting it wrong, it’s better to err on the side of caution and treat workers that you aren’t sure about as employees than to just assume you can get away with making every worker an independent contractor.

For more, check out our recent webinar on this topic, or schedule a consultation to discuss the specifics of your situation.

Independent Contractor Webinar

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