Independent Contractors vs. Employees: The Major Differences

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Take Action If You Are a Misclassified Independent Contractor

It is essential that workers understand the differences between being an employee and independent contractor. There are significant risks and liabilities misclassified independent contractors face, such as additional tax liability, lack of health and retirement benefits, and non-existent paid time off. This blog will discuss the differences between an employee and an independent contractor, how they are defined by law, and how independent contractor misclassification can occur if not done correctly.

The Differences Between Employers and Independent Contractors

The Fair Labor Standards Act has the broadest definition of an employee, which means essentially everyone can be an employee under the Fair Labor Standards Act.

The factors most courts rely upon to make the employee v. independent contractor decision are the following:

  • Who controls the work being done by the worker?

  • Does the worker have legitimate opportunity for profit or loss that is outside of the work being done?

  • Does the worker have to invest their own money in the work being done?

  • Is the length of time the worker spends with the job meaningful?

  • Does the worker perform the types of work the alleged employer routinely provide?

  • Is there a unique skill or initiative required to perform the job?

Determining Employer Control

In determining whether someone is an employee or an independent contractor, the level of control the employer has over said person is one key factor. These include whether the employer sets the worker's schedule, supervises their work, or limits their ability to work elsewhere. Technological means of supervision, the right to discipline workers, and restrictions on their time may also be relevant. Additionally, if the employer controls the economic aspect of the relationship, such as pricing and marketing, this can be an essential factor. It's also worth noting that control exercised to comply with legal requirements, safety standards, or contractual and customer service standards may be seen as indicative of control. The more control the employer has, the more likely the worker is an employee, while more control on the worker's side suggests that they are an independent contractor.

Determining Profit or Loss

When determining employee or contractor status, a vital consideration is whether the work performed is crucial to the employer's business. It is less about the individual worker and more about the function they fulfill. If the work is critical, necessary, or central to the employer's primary business, it leans towards an employee designation. If the work is not crucial, necessary, or central to the employer's primary business, it leans towards an independent contractor designation.

Determining Worker Investment

When determining a worker's classification, one important factor is whether their investments are capital or entrepreneurial in nature. Costs associated with performing their job, such as tools and labor, do not count as evidence of independent contractor status. To be considered independent contractors, workers must make capital or entrepreneurial investments that support an independent business or serve business-like functions, like expanding their work capabilities, reducing costs, or increasing market reach. While the worker's investments need not match the employer's investments exactly, they should still support independent business operations.

Determining Length of Work

Determining whether a worker is an employee or an independent contractor can be influenced by the duration and exclusivity of their work relationship. Workers with ongoing and exclusive relationships are likelier to be employees, while those with fixed work periods or who market their services to multiple entities are likely independent contractors. However, seasonal or temporary work does not automatically classify workers as independent contractors. It's important to note that the lack of permanence must come from the worker's independent business initiative rather than being unique to a particular business or industry to indicate independent contractor status.

Determining If Work is Integral to the Employer’s Business

Consider whether the worker is an integral part of the employer's business. This is based on the function they perform, not the individual worker. If the work is critical, necessary, or central to the employer's principal business, it favors the worker being an employee. If the work is not vital, essential, or central to the employer's principal business, it favors the worker being an independent contractor.

Determining the Worker’s Unique Skills

When determining a worker's status, one crucial factor is whether they use specialized skills to perform their job and if those skills contribute to a business-like initiative. If the worker doesn't rely on specialized skills or requires training from the employer to perform their duties, they are likely considered an employee. However, if the worker brings their specialized skills to the job and uses them to support a business-like initiative, they are likely independent contractors.

Most Workers Should Be Employees

The tests used to determine whether workers are misclassified independent contractors almost always result in a finding that a worker should be an employee. Ultimately, that is because most workers are controlled by the company for which they work, provided all essential tools and equipment, and work for meaningful periods of time.

Independent Contractor Misclassification Costs the Worker

Misclassified Independent Contractors are often shorted wages, and the wages they do receive are reduced further due to the fact they are not given the benefit of health insurance, vacation/sick leave, retirement plans, or tax withholdings by the real employer. Misclassified Independent Contractors often do not get paid overtime but are required to work as long as it takes to get the job done. There is a significant financial loss misclassified independent contractors suffer. Those classified as employees always come out ahead because of those benefits and additional pay. Employees can rely on a predictable paycheck, while misclassified independent contractors cannot.

Get Help From Our Nationwide Unpaid Wage Attorneys

Employees must understand the differences between employee and independent contractor status and ensure they are correctly classified to avoid potential serious costs. If you suspect your employer has misclassified your employment status or have questions about your rights as a worker, the Lawyers for the Workers® are here to help. ContactJosephson Dunlap to discuss your situation and to determine if you can seek rightful compensation for your owed wages.

Learn more about how we can help or schedule a consultation by calling (888) 742-7242 orvisiting our website.

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