Employee or Independent Contractor?
Knowing the differences between independent contractors and employees not only saves your business from unnecessary expenses but also can help build and establish your business’s culture. This article will quickly address the business and legal factors to consider before you make that hiring decision.
- Hiring an Employee
If you are hiring an employee, you are bringing work in-house. Generally, this means you not only dictate the results of their work, but you can direct how, when, and where the work is done. Essentially, the employee has the responsibility to follow your instructions within legal limits. However, you still have obligations to your employee.
Employers are responsible for withholdings and contributions to income tax, Social Security, Medicare, unemployment, and other taxes on employee wages. This places the burden on you to ensure that all necessary withholdings and contributions are properly calculated, withheld, and remitted before your employees are paid. Additionally, non-exempt employees are protected by state and federal minimum wage and overtime laws.
Businesses that have steady cash flows and consistent demand typically benefit from hiring employees rather than independent contractors. This provides better quality control to the business, as you control how the work is done.
It is important to note that businesses may not avoid their responsibilities to employees or relevant state and federal agencies by having an employee sign an “independent contractor agreement”.
- Hiring an Independent Contractor
By hiring an independent contractor, you are technically outsourcing the work you have. When you engage an independent contractor, you are bringing them in to provide a specific result. The independent contractor does not automatically have a responsibility to perform the work based on your specific instructions. For example, the employer does not control or have the right to control what the independent contractor does or how the independent contractor does their job. Your rights as an employer are narrower than with an employee.
Unlike hiring an employee, when business owners properly classify and engage an independent contractor, they are not responsible for withholding income tax or paying the employer share of Social Security and Medicare on the fees paid to the contractor.
Although independent contractors may be more expensive per project than an employee, for businesses that have highly seasonal or inconsistent demand, this option may be more cost effective than hiring employees.
- Determining Employment Classifications
There is no single test for determining the proper classification as states differ on what factors matter. Although many states consider similar factors, the determination can differ significantly. Hypothetically, the same worker who would be considered an independent contractor in Florida could be considered an employee in Pennsylvania, for example.
In determining whether a worker is an employee or an independent contractor, Florida applies a control-based test. In a nutshell, in a control-based test the central question is whether the company has the right to control not only the result but also the manner in which the work is performed. Additionally, a written agreement between the parties is given more weight in Florida than in other states. If there is a written agreement that is clear and the actual practice does not contradict it, the agreement controls in Florida. Also, a worker who sets their own schedule but works only for you can satisfy Florida’s control test and still fail Pennsylvania’s second prong.
If a business owner starts to control the nature of how an independent contractor performs their responsibilities under the contract, the business owner runs the risk of changing the relationship between the two. This introduces the possibility of misclassification.
If an employee is misclassified as an independent contractor, business owners may be subject to serious consequences such as being responsible for:
- Back pay for regular wages
- Back pay for overtime and other benefits
- State and federal taxes; and
- Penalties
Ultimately, it is important that business owners are clear on the type of work they think is best for their business and they correctly incorporate that into their agreements and practices. By knowing the differences between an employee and independent contractor and having that outlined in your agreements, you can save your business money and avoid any disputes from the outset.