There is certainly a fine line between someone who is an employee of a company, and someone who is an independent contractor. Companies looking to make a distinction with new collaborators must make sure they’re aware of the Fair Labor Standards Act (FLSA), and what differentiates an employee and an independent contractor. Straight from the horse’s mouth, “The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments.”
Some companies have tried to get away with calling a worker an independent contractor, when in fact they should be classified as an employee. The consequences for playing the system can be dire, and are best avoided by proper classification.
This article will help answer the question “employee or independent contractor,” and why it matters.
An employee of a company receives a steady paycheck from said company. They also follow direct orders from the employer. This means that if they are told to do something a certain way, they have to do it in that requested way. Employees may work in their own personal way, but they must follow what their boss has indicated they want done. An employee generally works for one company in a full-time role, but could also work for multiple companies part-time.
The IRS states that, “More detailed instructions indicate that the worker is an employee.” So if the instructions are detailed-oriented on how something should be done, and what exactly they want, then it’s most likely an employee doing the work.
An independent contractor is basically their own boss - self employed. They choose who their clients are going to be, and how much they want to get paid from said client. Independent contractors also have the freedom to complete a project in their own way (keeping within the parameters of what the client wants in general).
When determining whether someone is an employee or independent contractor, it’s helpful to keep in mind that independent contractors don’t receive paid time off, overtime, health insurance, or a 401K match. The absence of typical benefits is a characteristic of independent contractors. This is why most independent contractors have more than one client at a time, and determine their own stipulations for pay.
Why the Employee or Independent Contractor Distinction Matters
For companies, there are a few things to keep in mind for determining whether someone is an employee or independent contractor.
Companies have to pay additional taxes when they have employees, like unemployment, insurance, 401ks, etc. They do not have to pay these same taxes when they hire an independent contractor.
If someone doesn’t like the work of the contractor they hired, they can just go with a different contractor. Various employment laws make it difficult for companies to cycle through employees for the same reasons.
Along the lines of going with a different contractor, the contractor themselves can leave at any point. An employee tends to have a greater sense loyalty to their job and the company. Most employees follow a standard “two weeks notice” that gives an employer time to find a replacement, whereas independent contractors owe clients no such process.
Consequences for Misclassifying
If a company is classifying someone who should be an employee as an independent contractor, “it may have to pay legal fees, back wages, back taxes, penalties and damages.” Clearly, misclassifying between an employee or independent contractor is not worth the potential penalties!
Companies have to be aware of the difference between hiring employees, and hiring independent contractors. Both options have their own unique benefits, it just depends on what the company wants to specifically accomplish with the work they’re commissioning. Since both classifications have benefits, there shouldn’t be an issue with using both employees and independent contractors at a company.
Do you have any additional thoughts on the distinction between an employee or independent contractor? We’d love to hear your thoughts in the comments. And if you’re still a little confused, get in touch!