When talking to our clients about their staffing situations, we find that many of them believe they have independent contractors who are actually, to their surprise, considered employees. Today we’re talking about the differences between contractors and employees in the eyes of the law.
Our Short Answer
An easy way to remember the difference is that a contractor is someone who is self-employed and an employee is someone who is employed by your company.What usually distinguishes an employee from a contractor legally is the level of independence they have in performing the services for the company. Below are the most common factors considered, but note that the presence of one factor does not determine one way or the other.
A contractor makes his/her own hours. A company may have a certain deadline to complete a project, but it cannot mandate a contractor’s daily and weekly schedule. On the other hand, employee’s hours will most likely be set by the company.
A company directs an employee where they are authorized to work from whereas a contractor can work from wherever they choose to perform their services. However this may not apply to a situation when a project to be performed by the contractor has to be completed at a specific location, for example, if the services to be provided relate to construction or painting a mural.
Continuity of Relationship
Usually, an employee’s relationship with the company continues for an unspecified amount of time. However, an independent contractor relationship with a may terminate upon a completion of a particular project, or involves a relationship for multiple, sequential projects.
If a worker regularly must provide written or oral reports on the status of a project to a superior, this arrangement indicates a possible employment relationship. Contractors usually do not have to report to any superiors on progress achieved, as they are self-employed; rather, the contractor is performing services to conform to the specifications provided by the client.
Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
Travel and Business Expenses
Independent contractors typically bear the cost of travel or business expenses, which they typically include in the total cost of their fees. Direct reimbursement of travel and other business costs by a company suggests an employment relationship. Most companies adopt an expense reimbursement policy for their employees.
Provision of Tools and Materials
Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Contractors generally have and use their own equipment.
Rights and Benefits
There are rights and entitlements that come with being employed by a company in regard to minimum wage, overtime hours, vacation days, and severance packages. Additionally, employees may receive additional fringe benefits such as health insurance, family leave, retirement plans, etc. Contractors are not protected by these rights and are not eligible to receive these types of benefits.
Contractors generally openly market and promote their own services to others, since this is essential for them to obtain additional business. Employees, on the other hand, perform work on behalf of their employer and are generally not required to actively promote their employers’ services in order to receive payment for their work.
Employees who work full or part-time and earn either a salary or hourly wage, generally have taxes automatically withheld from their paychecks by their employer. Contractors, on the other hand, receive payments for their services directly without any tax withholdings and are responsible for their own taxes.
The Bottom Line
When hiring talent for your business, it’s important to understand the differences between contractors and employees to avoid any potential legal issues. If you’re unsure which is right for you and still have questions on this topic, we recommend reaching out to an experienced corporate attorney for advice. At Benemerito Attorneys at Law, we offer free consultations and would love to help guide you toward the right decision for your business.
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This blog is for informative purposes only. This information does not constitute legal advice. You should consult with a licensed attorney that can advise you according to your particular circumstances.