Independent Contractor or Employee? A Wise Choice Will Pay Dividends

For many early-stage businesses, it makes sense to utilize independent contractors rather than full-time employees. While it may seem simple to distinguish an independent contractor from an employee, the line is not as clear as it seems. Proactive businesses are aware of the distinction and take steps to maintain that distinction.

Courts and various governmental agencies (federal, state, and local) that regulate and determine worker status tend to construe independent contractor status narrowly. If they determine you have misclassified a worker, your business may be liable for back wages, overtime pay, employee benefits, disability, worker’s compensation, tax and insurance obligations, and possibly civil monetary penalties.

This question is even more prevalent with the rise of the gig economy, which has grown rapidly during the COVID-19 pandemic allowing technology to help serve those who were able to work from home. The gig economy includes independent contractors who do freelancing, temporary jobs, and project-based jobs.

Courts and agencies consider different factors when determining a worker’s status, but there is not a bright-line rule. Generally, each test examines the employer’s level of control over the worker. Since this is the case, certain factors are regularly used to distinguish independent contractors from employees. There are three simple questions to ask to differentiate between the two:



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 following characteristics. When viewed this way, the distinction can be clearer:

Independent Contractors:

• Often not vested with institutional knowledge and history
• Contract to be paid for a specific project
• Have discretion over where, how, and when they work
• Are responsible for their own tax obligations

Employees:

• Rely on institutional knowledge and history to perform job functions
• Are paid set wages and employed continuously
• Are directed by their employer as to where, how, and when they work
• Have their employer meet their tax obligations

It should also be noted that workers who perform a key, or controlling, function for your business, such as C-suite executive functions, should be classified as employees and not independent contractors.

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 Brian Massimino at Lavelle Law at 312-332-7555 or via email at bmassimino@lavellelaw.com.