Nearshore Americas
independent contractor

Employees vs. Independent Contractors: Why Labels Matter

In an industry where companies compete fiercely for a workforce that is highly skilled and highly mobile, it makes sense that independent contractors are widely used to meet project deadlines, fill a temporary workforce shortage, or save on the more expensive overheads that come from hiring employees.

Some tech companies are particularly hesitant to hire temporary workers as employees, while some workers are equally hesitant to relinquish the flexibility that comes from being an independent contractor. However, what both sides often fail to realize is that the classification of workers as employees or independent contractors doesn’t begin and end with the terminology that is used or with contractual terms.

Plainly speaking, it’s just more complicated than that.

Risks of Misclassification

The danger and uncertainty occurs when workers who are classified, or labeled, as independent contractors actually work in a manner that is consistent with that of an employee. In that case, the question becomes, how does a company go about making sure that all of its independent contractors are safely in the “independent contractor” classification?

Due to the many factors that play a role in the determination, the answer to that question is not black and white.

A smart company will make sure that any worker classified as an independent contractor actually works like an independent contractor should. If the relationship cannot function in that way, the worker should be made an employee in order to comply with U.S. law and eliminate the risks involved with misclassified workers.

Defining Workers Correctly

The main difference between an employee and an independent contractor is that, in a pure employment relationship, the employer directs and controls the work of the employee, including how, where, and when the work is done. In turn, in an independent contractor relationship the worker directs and controls their own work and the manner in which the work is performed.

The following are some (but not all) of the factors that may be looked at when the regulating entity classifies a worker’s relationship with a company.

By way of example, all of the following questions when answered “yes” indicate a higher likelihood that the worker would be considered an employee as opposed to a bonafide independent contractor:

  • The worker receives training from the company and/or follows the company-provided methodology to accomplish assignments.
  • The work being done by the worker is subject to continual review or supervision by an employee of the company, prior to completion of assignments.
  • The company sets the worker’s hours in some way, such as requiring that assignments be completed during regular business hours.
  • The worker is required to come into the company’s physical location to complete the work.
  • The worker does so much work for the company that the worker does not have the time or inclination to work for other companies.
  • The company pays an hourly rate rather than paying by the assignment.
  • The worker cannot do the work without the company’s resources, such as computers, physical office location, or specialized equipment.

Answering “yes” to some of these questions does not automatically make the relationship one of employer-employee. These are only a sampling of the factors that might be considered, and the entire relationship is looked at to make an overall determination.

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Get it Right, or Face the Risks

Failing to properly categorize a worker has serious implications for companies. The company may end up owing income taxes, payroll taxes, and benefits that have been provided to other employees. The company may also become the subject of an investigation by the regulating entity. Such investigations are time consuming and can be very costly due to the penalties associated with mis-classification of independent contractors.

In sum, companies should worry less about how they “label” or “classify” a worker and should become more concerned with “what” the worker is actually doing at work.

Gabriela Smith

Gabriela Smith is a business lawyer with over 10 years of experience in business law. She's Managing Attorney at The Smith Law Group and Counsel at Klemchuk.

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