What Is the Difference Between an Independent Contractor and an Employee?

Are you wondering whether you are an employee or an independent contractor? Does it matter? In many cases it does. There are legal differences between these two designations and these differences may affect your rights. From an employer's prospective, an independent contractor saves the company a lot of money because they are not required to withhold income taxes from an independent contractor. That means the employer does not have to pay FICA (Social Security and Medicare) or federal unemployment taxes. The same is true for state contributions to unemployment insurance and workers' compensation funds.

Due to all of these employer benefits, some companies are very quick to classify people who perform work for them as independent contractors instead of employees. However, this may lead to you being misclassified, and that is not a benefit for you.

Why is misclassification a bad thing?

By definition, independent contractors are self-employed. This means they are not covered by employment, labor or related tax laws. When you are misclassified as an independent contractor, you are also being denied access to certain benefits and protections, including Family and Medical Leave, overtime, minimum wage, unemployment insurance and other benefits provided by that particular employer to its employees.

How do you determine independent contractor status?

There are some questions you can ask yourself, to help you determine whether you should be considered an employee or an independent contractor:

  • Is my compensation based on a project-by-project basis?
  • Are my hours determined by my employer?
  • Does my employer provide the materials and equipment I need to perform my job?
  • Does my employer instruct me on how to accomplish the work assigned to me or am I given autonomy to complete the job as I see fit?

The "Right-to-Control Test"

These questions are important in determining your status. For example, the Internal Revenue Service uses what is known as the "right-to-control test." This method analyzes the degree of control the employer has over the way a person's work is performed. If the company exercises most of the control, the worker is considered an employee. The IRS has cracked down on misclassification of employees in the last few years because it has lost billions of dollars in tax revenue each year as a result of this problem.

There are many different tests or analyses used to determine whether independent contractor status should be applied. Back in 1996, a group known as the Commission on the Future of Worker-Management Relations recommended that a simplified and standardized definition of an employee should be applied to employment, labor and tax laws in order to reduce the confusion and abuse of misclassification by employers. This commission recommended a standard based on the so-called "economic realities test."

The "Economic Realities Test"

The "economic realities test" is said to make it more difficult for employers to classify a worker as an independent contractor. In addition to considering the amount of control the employer exercises over the worker and his work, it also takes into account how much the worker is economically dependent on the business. This method is also used in determining employment status for purposes of the Family and Medical Leave Act, the Fair Labor Standards Act and other federal employment laws.

As this definition has not yet been clearly or uniformly defined, consulting with an experienced employment law attorney is advised if you believe you may be a victim of intentional or unintentional misclassification.

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