As a business owner we sometimes wonder about the differences between an independent contractor vs employee. We are constantly looking for ways to save on labor without hurting quality or quantity of work.
One way that some businesses might fall into the trap of accomplishing this is classifying everyone as an independent contractor vs employee so that they do not have to pay payroll taxes, workers compensation, social security taxes, overtime, benefits, follow certain federal programs, etc.
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If it was only that simple everyone would be doing it!
Just to be clear the law on determining this, The Fair Labor Standards Act, generally leans in the favor of classifying someone an employee versus independent contractor. In fact, the rules mainly deal with controlling an individual versus the individual being able to operate independently, i.e., independent contractor.
Unfortunately, there is no one rule that makes it crystal clear to classify someone as an independent contractor vs employee.
With that in mind let’s look at some factors that would help us determine what an independent contractor is versus an employee.
Controlling a person while on the job would play a huge part in determining whether someone is an employee or independent contractor.
As an example, if the business owner dictated the stop and start times of an individual, when they went on breaks and lunch, and what they did while at the work site, the chances are extremely good that the individual would be classified an employee.
On the other hand, if the business owner only dictated a window of time that work could be performed, and what the final outcome needed to be they just may be an independent contractor.
If the individual is performing the work when they want at their offsite location using their own tools and equipment the chances are very good that they are a contractor.
In most cases a contractor can decided when and if they come to work without penalty from the business owner, unless of course they are not meeting the specifications of an agreement. In other words, the business owner and the contractor agreed that the work would be finished by a certain date and that date has come and gone.
Another factor in independent contractor vs employee is the level of skill and whose tools and/or equipment is being used to produce the work.
Typically, if the business owner’s tools and equipment are being used there is a better chance that the individual will be considered an employee versus independent contractor.
If the business owner is assuming all the risk for losses then this would be another reason to seriously consider the individual an employee.
So, as an example, if an individual is being asked to produce two hundred widgets to a certain specification and the individual has to remake one hundred because they did not meet the business owner’s specifications, who is responsible for the financial lose to remake them? If it is the business owner’s responsibility then it strongly appears that the individual is an employee.
The skill level of the individual is another piece of the puzzle. Skills such as attorneys, accountants, electricians, plumbers, are just a few examples of very skilled positions that depending on many other factors might fall into the classification of contractor vs employee. Keep in mind that this alone does not determine their classification.
So, let’s look at an example.
If you asked a Certified Public Accountant to perform your accounting duties at your business and this is the only work the CPA does, they do it at your facility, using your computer, and have done it for a few years, I would almost guarantee that they are going to be considered an employee.
On the other hand, if the individual has many other businesses that they perform work for and do it at their own office on their own schedule they would be considered a contractor vs employee. Why? Because they are controlling the work and when it is being done, as well as, the paying the cost of the facility, utilities, etc. They are only responsible for the outcome of the work and nothing more.
There are many other factors that go into determining whether someone can be considered an employee versus independent contractor so make sure you consult with a legal professional for advice. Understand that nothing in this article is to be considered legal advice. It is solely based on my experience as a Human Resources Professional.
The cost of getting it wrong could be very detrimental to your business. You may become responsible for the retroactive back taxes, overtime, and benefits, if you wrongly classified someone a contractor and they should have been considered an employee.
May God Bless You!