• February 2020
    M T W T F S S
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What Is the Difference Between Employee and Independent Contractor?

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Before your company makes new hires, it is important to make critical distinctions between the types of workers you may seek to add to your team. The choice to hire contractors versus part-time or full-time employees has numerous legal and financial consequences. While hiring contractors may be tempting from a financial standpoint, doing so will limit your control over your workers’ jobs and may leave your company vulnerable to misclassification liability if you do not make certain proactive choices.

Time and Money Aren’t Everything

The traditional perception of contractors is rooted in the length of time individuals remained employed with a company. In the past, contractors were primarily hired for only a few weeks or months at most. These temporary workers or on demand workforce were generally tasked with piece work, tasks that needed to be completed by a specific deadline and/or overflow work that a company’s part-time or full-time workers could not manage for various reasons. They were often paid significantly less than company workers, partially because the company had little reason to invest in their loyalty and long-term ability to perform. Contractors were treated as on-demand workers who understood that their positions would only exist for a short period of time.

Nowadays, contractors are no longer defined by their compensation rates or even by the tenure of their positions. The differences between employee and independent contractors is now primarily a legal one. It is therefore uniquely important that a company understands these differences before hiring contractors and/or employees because these hiring decisions result in specific legal obligations and benefits for the company itself.

Defining the Relationship

There are two principal differences between employee and independent contractor. The first is that contractors are not generally protected by federal and state labor laws. The second is the relationship between the worker and the company itself. The relationship aspect of any potential hiring decision is one that companies must consider carefully due to the potential consequences involved.

Virtually every aspect of an employee’s experience working for a company is controlled by the company itself. The company’s human resources department hires the employee, withholds taxes from that individual’s paycheck, dictates all business-related aspects of his or her job and provides that employee with certain benefits. If that employee becomes pregnant, disabled or is injured on the job, he or she is generally protected under the law.

By contrast, a contractor’s work-related experience is largely divorced from the intimate nature of the employer and employee relationship. Sometimes these distinctions are practical in nature. For example, many companies do not pay contractors directly, but instead pay staffing agencies who then reimburse contractors according to their own policies and practices. Other times, these distinctions are fundamental. Employees generally handle work that functions as a key aspect of their business, whereas contract work is limited in scope. Companies do not generally retain a “right to control” too many aspects of a contractor’s work. Controlling too much of what a contractor does may open a company up to allegations of misclassifying an employee as a contractor.

Oftentimes, staffing agencies hire workers who then complete contract work for other companies. It is therefore the staffing agency that technically “controls” the contractor’s position, not the company. It is a legal distinction, but an important one given the ways in which companies may ultimately be held liable for the treatment of contractors versus employees under the law. Contractors also have no taxes withheld from their paychecks and are not generally protected by the same labor laws that protect part-time and full-time employees.

Making Critical Decisions

Why does classification of new hires as contractors versus employees matter? Hiring contractors is a potentially attractive option because they do not have to be paid benefits, they represent less of a tax liability and they are not covered under workers’ compensation laws. However, treating contractors like employees leaves companies vulnerable to misclassification-related liability. For better and for worse, it can be difficult to employ contractors effectively without retaining the kinds of control a company needs for its workers to be effective in their roles.

Rather than leaving your company potentially vulnerable to misclassification liability, speak with the LawTrades team today about building a solid team of workers that meets your practical, financial and legal needs. We have extensive experience in both helping companies to add experienced workers to their existing teams and helping companies to build teams from the ground up.