Comparing Independent Contractors and Traditional Work Roles

The independent contracting system allows businesses to hire an individual or company to perform specific tasks that are outside the scope of their normal operations. Yet the line between them and bona fide employees is often blurry, and some companies inadvertently (or even intentionally) misclassify their workers as contractors. This mistake could cost you significant tax and legal penalties, in addition to disrupting your company’s work. Our Labor & Employment Law team examines the critical differences between independent contractors (also known as 1099 workers) and employees.

1099 Workers Versus Employees

Independent contractors are individuals who work for themselves in established trades or professions. They provide specific services to various businesses on a limited, contractual basis. These services differ from the typical business operations of the companies that contract with them. An example might be a forensic accountant who is hired by an industrial company to determine if anyone is embezzling or misusing company funds. Because they are self-employed, independent contractors are not considered employees of the companies with which they contract.

Conversely, employees work directly and indefinitely for a single company on a continual basis, providing work that is directly in line with the company’s normal business operations. The employer provides its employees with numerous benefits arising out of the employment relationship, including health insurance benefits, participation in retirement plans, and tax withholding. These benefits are not usually extended to 1099 workers.

Because employees enjoy greater benefits than 1099 workers, they cost the employer more money. Therein lies the temptation for many companies to mistakenly classify their employees as contractors. But doing so is likely to land the business in legal hot water. The IRS, Department of Labor, and state agencies can impose significant financial penalties, in addition to the potential court judgments that employees may win against these companies.

Tips to Distinguish Between Independent Contractors and Employees

Merely labeling a worker as an independent contractor doesn’t necessarily make it so, even if the worker has signed a contract to that effect. These are a few signs that a business has misclassified an employee as an independent contractor:

The company directs and controls the work. The degree of control exerted by the company has a significant bearing on the worker’s status. For instance, ask whether your company:

  • Decides when its workers show up to do their jobs?
  • Sets the number of hours its workers can work (including overtime limits)?
  • Controls which jobs its workers will perform?
  • Dictates the manner in which the job will be done?
  • Determines the method of paying its workers?

If the answer to these questions is yes, then the workers in question are likely employees.

The company provides the equipment that workers use. An independent contractor should already have an established business, and therefore have his or her own tools or equipment. Meanwhile, if a company provides the tools, supplies, and implements used by its workers, then an employment relationship is more likely.

The company sets the earnings. A worker is probably an employee if he or she is regularly (e.g. weekly) paid a predetermined amount. Employees also don’t risk losing money by doing their jobs. Conversely, independent contractors may realize profits or losses in their work.

The worker’s services align with what the company does. An employee is someone whose job tasks directly advance the business objectives of his or her employer. If the worker’s services differ substantially from what the company does, this person could be an independent contractor.

The worker has not invested in the company. Employers invest money in their employees; employees usually do not invest money or resources into their employers. On the other hand, an independent contractor invests money in his or her own business.

A traditional employment relationship exists. Ask yourself these questions:

  1. Is your relationship with the worker brief (likely an independent contractor) or indefinite (likely an employee)?
  2. Do you provide the worker with standard benefits like health insurance? (likely an employee).
  3. Does the worker acquire marketable skills through performing his or her job tasks (likely an employee) or did he or she already have such talents (likely an independent contractor)?

Seder Law is Here to Guide Your Business

Our goal is to help employers understand both their legal rights and duties. If your organization routinely uses independent contractors, let us take a look to help ensure you aren’t breaking the law. Call Seder Law today to learn more.