Are You an Employee or an Independent Contractor?

Are you called an independent contractor, even though you do the same work, following the same rules, as company employees? If so, you may have been misclassified as an independent contractor. Some unscrupulous employers call workers "independent contractors" to avoid having to pay payroll taxes, provide benefits, and follow employment and labor laws, when those workers should really be classified as employees of the company. This article explains how to figure out whether you are really an employee or an independent contractor. 

What Is an Independent Contractor?

A true independent contractor is someone who runs his or her own business. Whether called contractors, freelancers, entrepreneurs, consultants, or any other name, independent contractors have two things in common: they are in business for themselves, and they don't rely on a single employer to make a living. A classic example of an independent contractor is a plumber or other tradesperson. Although a plumber might come to your house and do some work for you, the plumber isn't your employee. The plumber works for many people, brings his or her own tools and equipment to the job, and generally works on a one-time basis. Although you might someday need the plumber again, the plumber doesn't show up to work at your home every morning.

What Are the Differences Between Employees and Independent Contractors?

Employees and independent contractors both do work in exchange for money. However, employees work under the day-to-day control of the employer, performing the type of work that is integral to the business the company does. A contractor generally is hired on a per-job basis, because of his or her special expertise in an area that's outside the company's usual operations. For example, a software company might hire employees to staff its customer service center, but hire an independent contractor to paint its offices or design its logo. 

The IRS is very interested in the proper classification of employees and independent contractors. Why? Because the IRS gets its money faster -- and with more certainty -- from workers classified as employees. Employers must withhold payroll taxes and income taxes from employee paychecks and remit the money to the IRS. On the other hand, independent contractors are responsible for reporting and paying their own taxes; no money is withheld (or paid on their behalf, in the case of Social Security or Medicare) by the company that hires them. 

Under the IRS test, workers are considered employees if the company they work for has the right to control the way they do their jobs, including when, where, and how the job is to be accomplished. On the other hand, a worker will be considered an independent contractor if the hiring company does not manage how they do the work, but only has the right to accept or reject the final result. 

A worker is more likely to be classified as an employee if the worker:

• works full time for the company
• gets company benefits (such as health insurance and vacation time)
• receives instructions and training from the company
• is paid by the hour
• can quit at any time, without liability,
• can be fired at any time (at will), and
• does work that is an integral part of the company's everyday operations. 

On the other hand, a worker is more likely to be classified as an independent contractor if the worker:

• is paid by the job
• determines what hours and days to work
• does work for more than one company at a time
• provides the tools and equipment necessary for the job
• has the opportunity to suffer a loss or earn a profit from doing the work
• invests in his or her own equipment and facilities
• pays his or her own business and travel expenses, and
• has employees.

Why Does It Matter? 

Proper classification of employees and independent contractors is important for many reasons. As noted above, tax authorities get their money faster when workers are classified as employees, because their employer must withhold taxes. In addition, employers must pay half of each employee's Social Security and Medicare taxes (the rest is withheld from the employee's pay); independent contractors must foot this whole bill on their own. 

But there are many other differences between employees and independent contractors, stemming from the fact that independent contractors are running their own businesses, while employees are working for others who have more bargaining power. Employees generally have many more rights and protections than independent contractors, and employers have more obligations to employees. For example:

• Employers have to provide workers' compensation coverage for employees, but not for independent contractors (who are supposed to carry their own insurance). 
• Employers must pay into the unemployment insurance fund for employees, but independent contractors can't collect unemployment benefits. 
• Employers don't have to provide any benefits to independent contractors.
• Employers must observe wage and hour laws (overtime, minimum wage, and so on) in their relationship with employees, but independent contractors aren't protected by these laws. 
• Employers may not discriminate against employees, but independent contractors generally are not covered by laws prohibiting discrimination. 

Getting Legal Help

Unfortunately, the weak economy has led some employers to misclassify employees as independent contractors, simply to avoid their obligations under employment and labor laws and cut costs. In fact, some employers fire employees, only to rehire them to do the same work as independent contractors -- at lower pay and with no benefits. If you believe you have been improperly classified as an independent contractor, you should contact an experienced employment lawyer.