There are two types of people who may perform work for a company. Employees are people who are on the payroll, who are subordinate to the employer and whom the law affords certain rights. Independent contractors are people who have a business relationship with another company. They run their own business and provide services to others on a contract basis.
The line between independent contractors and employees can be thin and blurry. Nevertheless, it is important for an employer to classify workers correctly or there could be legal repercussions.
Why is it important to classify workers correctly?
Sometimes there is a legitimate misunderstanding as to whether classification as an employee is more appropriate than an independent contractor. For example, sometimes it is a common practice in an industry to classify certain workers as independent contractors. However, federal law sets criteria that define who is an employee.
If a worker fits the definition of employees according to the law, it is illegal to misclassify them as independent contractors. An employer who does so, intentionally or otherwise, could get in trouble with the Internal Revenue Service for not paying what he or she owes in payroll taxes. Furthermore, the law affords employees certain rights that independent contractors may not have, and misclassification could deprive a worker of his or her rights.
How does an employer tell whether a worker is an employee or an independent contractor?
According to the Department of Labor, the Supreme Court has ruled that there is no single characteristic that distinguishes employees from independent contractors. Rather, there has to be consideration of all the circumstances to make the determination. There are certain factors that the Supreme Court has deemed significant, such as the control that the employer has over the duties that the worker does and how integral the duties that the worker performs are to the business that the employer runs.
For example, a worker who performs work that allows the employer to run his or her business may be an independent contractor, but one who performs the type of primary work that the employer performs may be an employee.