When hiring workers, knowing whether they’re employees or independent contractors is essential. The difference between the two can significantly impact your business, including your tax liability, your liability for workers’ compensation claims, the worker’s rights and benefits, and your ability to control how your workers do their jobs.
Read all about it here, and check out our handy infographic at the end of this article for a quick cheat sheet!
The Difference Between Employees and Independent Contractors
Employees typically earn wages on a salary or hourly basis. They are subject to the employer’s control over how they do their work. This control includes things like the hours they work, the tasks they perform, and the tools and equipment they use. Employees are also generally entitled to benefits like health insurance, paid vacation, and sick leave.
Independent contractors, on the other hand, are not subject to the same level of control. They typically set their own hours, choose their own tasks, and use their own tools and equipment. Independent contractors are also responsible for their own taxes and benefits.
How to classify workers correctly:
As of 2021, the Department of Labor (DOL) emphasizes the two core factors for determining whether a worker is an independent contractor:
- The degree of control that the client exercises over the worker. This factor includes whether the client sets the worker’s hours, tells the worker what to do, and provides the worker with tools and equipment.
- The worker’s opportunity for profit or loss. This factor includes whether the worker is paid a fixed fee or a commission, and whether the worker has the opportunity to make a profit or loss on their work.
If a worker meets both of these core factors, they are likely to be classified as an independent contractor. However, the DOL also includes three variables that can help determine independent contractor status if the core factors are not clear:
- The degree of permanence of the working relationship, considering whether the working relationship is definite in duration or sporadic.
- Whether the work performed is part of an integrated unit of production; a larger project that is controlled by you.
- Whether the worker is performing work that is outside the usual course of your business. Is the work something you would typically do yourself or have your employees do?
An employer should consider all of these factors in totality when classifying a worker. “The U.S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA.” (Source: DOL)
In late 2022, the DOL published a Notice of Proposed Rulemaking, which would change the criteria for determining whether a worker is an employee or an independent contractor. The DOL is currently reviewing the submitted comments, but there isn’t an ETA on any new regulations. We’ll watch for upcoming changes and keep you informed.
In the meantime, the 2021 standard outlined above still applies. If you need help classifying your workers correctly, please get in touch with an attorney or your HR Business Partner at Nextep.