By Jonathan Schmidt | Guest Column
If you run a business, you may have employees and you may have independent contractors. Sometimes, you may have both groups of people performing services that are somewhat similar. Legally, however, there are differences between the two. It is important to understand these distinctions and the impact they have.
An independent contractor runs his or her own business but performs services for another business at the request of that business. Often, an independent contractor is retained in connection with a specific project or task, but not for ongoing and continual employment. An employee is hired by a company to perform specific work at the employer’s direction and is paid directly by the employer for those services – usually on a long-term basis.
One key difference between independent contractors and employees is taxes. For employees, companies typically withhold income tax, Social Security and Medicare from their wages. The independent contractor is responsible for doing that on his or her own. Additionally, from a legal perspective, employees are typically covered by a variety of federal and state employment and labor laws, to which independent contractors are not subject.
Typically, state and federal laws require that an employer provide workers’ compensation coverage for their employees. The purchase of workers’ compensation coverage by the employer benefits the employer and the employee in that the employee is covered for medical bills, lost wages and other damages incurred as a result of injuries that happen during their employment. However, the employee is prevented from directly suing their employer for a work-related injury or illness.
By contrast, an employer is usually not required, by federal or state law, to provide workers’ compensation coverage for an independent contractor. This means that if an independent contractor is injured on the job through any fault of the employer, they could file suit against the employer to recover damages. Though it is not required, employers may seek to hire independent contractors who have their own workers’ compensation coverage. The contracting company may decide that the potential cost of a lawsuit is not worth the risk of hiring an independent contractor without workers’ compensation coverage.
Keeping that in mind, many independent contractors purchase workers’ compensation insurance, finding that the cost is worth the additional work they are likely to receive by being insured. This is particularly true in industries like the construction industry, which carry a higher risk of injury.
If an individual is an employee, federal and state laws require that he or she is placed on a regularly scheduled pay period, which remains the same unless formally changed. While pay periods can vary from one week to one month, they must be routine and occur as scheduled. Moreover, federal and state laws require that an employee be paid on his or her normal pay date or earlier if the paycheck is not negotiable on the normally scheduled pay date – if, for example, that date is a holiday. Employees are typically paid either an hourly rate or by salary.
Independent contractors have more flexibility in payment schedule and structure. A contract with an independent contractor may be for a total lump sum amount that is paid when the job is completed, or for an hourly, daily, or weekly amount that ends on a specific date. The contractor and employer have the flexibility to determine which option would work best, based on the circumstances involved. Typically, contractors send an invoice for the amount due and are paid after the invoice is received. In most business, contractors are not paid by payroll staff.
If it remains confusing as to whether an employee is an independent contractor or an employee, ask yourself these questions:
- Does the company control, or have the authority to control, what the worker does and the how the job is performed?
- Does the company control the business aspects of the worker’s job (how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies – the employer or the worker)?
- Is there a written contract or employee benefits like a pension plan, insurance, or vacation pay?
- Is it an ongoing relationship, beyond one project or a few related projects?
If the answers are yes, it is likely the worker may be an employee. By contrast, if the worker is hired by the project, receives no benefits or regular salary, is not engaged for ongoing work on an indefinite basis, and provides his or her own tools, supplies, and other materials, the worker may be considered an independent contractor.