Employee v. Independent Contractor

Are you starting a business and need to hire more personnel? If so, have you thought about whether to hire an employee or an independent contractor? If not, please take a second to learn of the main differences between the two, below:

Why does it matter?

At first glance, you may be asking yourself: why does this even matter? Well, JUSTLAW is here to tell you it does, most importantly for tax liability purposes, among other things. 

Employers must pay a whole variety of taxes for their employees. However, that is not the case for employers who hire independent contractors. Employers don’t have to pay any taxes such as Social Security, state and federal unemployment tax, etc. If employers hire employees for their business, those taxes mentioned above and a list of others must also be paid. Therefore, it is clear that employers almost always prefer to hire independent contractors over employees from a tax liability standpoint. 

In addition, employees are protected by federal laws such as minimum wage, laws protecting their overtime work, and employment discrimination. Independent contractors have no such rights provided by federal law, specifically for overtime and employment discrimination. 

business law regarding freelancers
It’s vital to establish whether someone who works for you is an employee or independent contractor

Employers also should know that independent contractors do not normally receive employment benefits. To the contrary, employees enjoy such benefits including paid time off and various health benefits. 

Accordingly, it is quite obvious that almost anyone would prefer to work as an employee. However, most employers prefer independent contractors. From an employer’s standpoint, it really depends on the type of business they are operating and the type of positions they are looking to fill. For example, a startup has different needs compared to that of a 20-year successful public company. 

How can you tell if someone you have hired is an employee or an independent contractor? 

Usually, it is pretty obvious and easy to decipher. Employment contracts will explicitly state if the person hired is an employee or an independent contractor. 

However, in other cases, it is not as obvious. Luckily, courts have provided us with an array of factors to consider to determine whether someone is an employee or an independent contractor. These factors are commonly referred to as the “Economic Realities Test”: 

 

  1. What is the degree of control over the person’s work? Who exercises that control?
  2. What is each party’s (person and business) degree of loss in their exchange?
  3. Who has funded the person’s purchase of materials needed to complete their tasks such as equipment and supplies?
  4. How long-lasting is the person’s position? 
  5. Would the business suffer if this person was not present? How important are they to the business? 
  6. What degree of skill and expertise is needed to complete the applicable work? 

* * * * * *

Speak to a JUSTLAW attorney today to initiate your first consultation and receive immediate advice as to whether to hire an employee or an independent contractor. 

This post is not legal advice. It is for general informational purposes only. No reader should rely on this information in any way whatsoever without first seeking legal advice. 

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