Independent Contractor or Employee: What’s the Difference and Why is it Important?

By: James D. Voigt

April 11, 2016

For many early-stage businesses it makes sense to utilize independent contractors rather than full-time employees. While it may seem simple on the surface to distinguish an independent contractor from an employee, and vice versa, the line isn’t as clear as it seems. It is important for every business to ensure that a true distinction is present though, because the various agencies (there are federal, state, and local) that regulate and determine worker status, as well as the courts, tend to construe independent contractor status narrowly. If they determine a worker is misclassified, your business may be liable for, among other things: back wages; overtime pay; employee benefits; disability; worker’s comp.; tax and insurance obligations; and even civil monetary penalties in some cases. With the continued growth of the “gig economy,” the regulatory agencies are taking ever closer looks at the distinction, so it is an especially important question to get right.

The different agencies can, and often do, use different tests to determine a worker’s status, and there is not one that controls in every instance. As a baseline though, each test examines the employer’s level of control over the worker as a whole. Since this is the case, there are certain factors that are regularly used to distinguish independent contractors from employees. This means that there are certain questions that you can ask yourself to distinguish between the two. Three of the simplest questions to ask are:

  1. What is the precise role of this person going to be? Are they professional staff, or support staff?
  2. Where and how are they working? Are they coming into an office, or do they work somewhere of their own choosing?
  3. How are you paying them? By the hour; by project; by availability; some other way?

You can better determine whether a worker is an independent contractor or an employee based on the answers to these questions. When viewed this way, the distinction can actually be rather simple:

Independent Contractors:

  • Perform standardized or routine work.
  • Contract to be paid for a specific project.
  • Have discretion over where and how they work.
  • Are responsible for their own tax obligations.

Employees:

  • Perform skilled work.
  • Are paid set wages and employed continuously.
  • Are directed by their employer as to where and how they work.
  • Have their employer meet their tax obligations.

As a practical matter, these factors make it easier to classify skilled workers – i.e. a worker with professional or technical capabilities that make them uniquely suited to the role in question – as independent contractors. In closing, it should also be noted that it is an accepted rule across the regulatory agencies that a worker cannot be an independent contractor if they perform a key, or controlling, function for your business. Such functions include, but are not necessarily limited to, anything that a C-suite executive would normally do.

Lavelle Law can review your employment relationships to help determine if your workers are independent contractors or employees. We can also assist with negotiating and documenting agreements between your business and independent contractors. If you would like more information on this subject, or other matters relating to Entrepreneurial Law, contact attorney James Voigt at Lavelle Law at 847-705-7555 or via email at jdvoigt@lavellelaw.com.