Posted On:

There have been many discussions lately about the difference between an employee and an independent contractor. Laws have been passed or proposed in many states that redefine an employee, specifically to curb the incorrect use of the gig economy by large technology companies such as rideshares or delivery apps. It’s brought the issue into focus, and companies need to know when and how to classify someone in the right employment category. Let’s take a closer look.

When do You Classify Someone as an Employee or Independent Contractor?

How Worker Classification is Determined

There are a few legal rules to follow to determine if someone is an actual independent contractor or an employee.

  • Does the company have control or the right to control how or when the worker does their job?
  • Are business aspects of the work controlled by the payer, such as providing a computer or reimbursing expenses?
  • Are there any written contracts in place providing employee-like benefits?

When evaluating work relationships, it’s important to weigh each of these categories.

Definition of Employee

A worker classified as an employee is under the control of the employer. That means the employer can determine when, how, and where the work is supposed to be done. So an employee is someone with established hours, start and end times, and access to employee equipment and benefits. An employer doesn’t even have to have control over these things, but it’s enough to determine employee status if they have the right to have control. Someone classified as an employee should be paid a salary or hourly wage, and the employer is responsible for all the necessary tax deductions.

Definition of Independent Contractor

On the other hand, independent contractors have control over their work. Goals and a deadline can be established, but the contractor determines how and when the work is completed. The result is the most crucial part of the job, not the means. Independent contractors are paid based on an established fee. They are also not included in payroll taxes but must submit a W9 and be issued a 1099 at tax time.

The Implications of Misclassification

The most common reason companies misclassify employees as contractors is to avoid the financial requirements of an employee relationship. By issuing a 1099 rather than a W2, the company isn’t responsible for paying payroll taxes throughout the year. However, the IRS has stiff penalties and fines if misclassification is determined. To correct the situation, employees must retroactively classify their contractor as an employee and transfer all the correct payroll information. A better solution for some employers is to work with a staffing provider who will be the employer of record for short or long-term workers.

Can your agency be the answer to your client’s compliance questions?

Anserteam Workforce Solutions represents North America’s very best staffing agencies aligned together to deliver world-class workforce management solutions. We offer end-to-end talent services that can be customized for any size business, utilizing our Managed Services Provider (MSP) model and Vendor Management Solutions (VMS) technology. Is your organization seeking a WBENC-certified diversity partner to provide measurable results and substantial cost savings?  Contact us today.