Employee or Independent Contractor, Who to Hire?
An employee is a person who performs services for you where you control what will be done and how it will be done. An independent contractor is a person or entity that is engaged in the business of providing services to others where you only have the right to control or direct the result of the work and not what will be done and how it will be done. Hiring?
We know what you’re thinking: “That’s great, but what the heck does that mean?
The analysis of whether a particular worker is an employee or an independent contractor is often complicated. We recommend that you consult your attorney if you have any questions. This blog post should not be construed as legal advice.
With that said, let’s look at how the IRS guides businesses when deciding whether a worker is an employee or a contractor.
The IRS advises businesses to consider three categories of factors: Behavior Control, Financial Control and Relationship of the Parties.
A full analysis takes into account all of these factors, with no one factoring controlling the outcome.
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control factors are:
- Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
- Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
- Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
- Training a worker on how to do the job — or periodic or on-going training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:
- Significant investment in the equipment the worker uses in working for someone else is evidence that the worker is an independent contractor.
- Unreimbursed expenses. Independent contractors are more likely to incur unreimbursed expenses than employees.
- Opportunity for profit or loss is often an indicator of an independent contractor.
- Services available to the market. Independent contractors are generally free to seek out business opportunities.
- Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
Relationship of the Parties: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
- Written contracts which describe the relationship the parties intend to create are helpful. However, a contract stating the worker is an employee or an independent contractor is not sufficient in and of itself to determine the worker’s status.
- Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
- The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
- The extent to which services performed by the worker are seen as a key aspect of the regular business of the company. If the services are a key aspect of the regular business of the company, this tends to suggest that the worker is an employee.
Now that we have a better understanding of the difference between an employee and independent contractor.
The next step is to understand why it matters.
Stay tuned for a future blog post about the implications of misclassifying workers as independent contractors when they really are employees.
We’ll just say that the potential consequences of misclassifying your workers are staggering.
When in doubt, pay the worker like an employee.
Written By: Matt Deen, Partner at Black + Deen, LLP