I am contacted many times throughout the year to participate in entrepreneur panels, business round-table discussions, present at area chambers of commerce and discuss what’s current in marketing. Many times, I’m accompanied by lawyers, accountants, real estate investors, financial planners/advisors and other folks MUCH smarter than me. (Side note: I always get the fun stuff. Marketing questions are the BEST). During those presentations, when to hire employees always comes up. And since Covid-19 has changed how we work and who we employ, I figured now is as good of time as any to shed some light on the differences between Independent Contractor and Employee.
I’ve been in this marketing world for over 20 years and have experience as an intern (paid and unpaid), administrative, customer service, project management, client relationship manager, production scheduling, print production coordinating, graphic design, social media, business development and most notably independent contractor fully accepting my business owner role. I say this not to toot my own horn, but to provide “street cred” to the opinions that follow.
Staffing Decisions for Business Owners
There’s an area within business building that is very cloudy, confusing and abused. Business owners are unsure when to hire someone as an employee because it comes with stacks and stacks of responsibilities. Business owners are concerned about using independent contractors because of control, intellectual property, deadlines and workflow issues. Many independent contractors just want to work for themselves, but do not understand the ins and outs of the law.
With Covid-19 causing many businesses to adjust their staffing, now is a perfect time to freshen up on the difference between an independent contractor and an employee. This article has been reviewed by two uniquely different lawyers, and the resources from the IRS have been made available as links. Enjoy my conjecture, but understand this is also my perception and opinion. It is always best to consult with your business attorney, tax professional and business coach when determining the best course of action. Need a referral? Contact me, I have several established and knowledgeable contacts ready to sign on and help.
Fun fact: I’m not a lawyer. I don’t give out legal advice, nor should this blog be constructed as such. Carrying on…
The loaded question.
What are the differences between an independent contractor and an employee? Let’s take a closer look.
Merriam-Webster defines “Independent Contractor” as: “A person hired to do work who controls how the work is done”
Merriam-Webster defines “Employee” as: “A person who works for another person or a company for wages or a salary”
The above definitions should answer any and all questions pertaining to this topic right? Not quite. The devil is always in the details and those details happen to be the most important part.
The devil is in the details.
Details, from time to time, have a knack for being elusive. Believe it or not the IRS (Internal Revenue Service) website has a plethora of information available for consumer consumption on this very topic. Let’s take a look at what the IRS has to say about those details.
- “The general rule is that an individual is 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.”
- “An independent contractor is generally free to seek out business opportunities.”
- “A lack of employee benefits does not necessarily mean the worker is an independent contractor.”
- “Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”
- “An employee is generally subject to the business’s instructions about when, where, and how to work. The following are examples of types of instructions about how to do work.”
- When and where to do the work.
- What tools or equipment to use.
- What workers to hire or to assist with the work.
- Where to purchase supplies and services.
- What work must be performed by a specified individual.
- What order or sequence to follow when performing the work.
- “A degree of instruction which means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.”
- “If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.”
- “If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship.”
- “An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time.”
You can learn more about the other types of employee categories on the IRS website, which include statutory employees, statutory non-employees, and government employees. If you are an independent contractor and are concerned about your rights, I encourage you to check out the website for Workplace Fairness in addition to contacting your accountant or legal counsel.
Common Law Rules (directly from IRS.GOV)
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
That’s quite a bit to take in.
Summary: the first step is identifying the working conditions and expectations. Continuing on from the IRS website:
- “If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.”
- “If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities.”
Seems pretty clear cut, right?
You may be wondering at this point, why I’m spending time on definitions. Both the independent contractor and the business owner should have a clear understanding of the situation before engaging in any mutual agreement. Misclassification (knowingly or unknowingly) can put business owners at risk audits, significant tax penalties and potential jail time. Tune in to our next blog where we further discuss the confusion centered around independent contractors vs. employees and the importance for proper classification.