Employee or independent contractor?

Independent contractors – also know as consultants, contractors, or freelancers - can provide much needed expertise when a specialized project needs to be completed or when you don’t have the resources to get the job done through the use of your existing staff. Independent contractors are usually professionals or trade persons, and many possess a specialized degree, license, or training.

Although independent contractors can provide the ability to quickly meet the demands of a specialized project, incorrectly classifying an employee as an independent contractor can have serious implications. Because the employer isn’t responsible for payroll taxes or for providing an independent contractor with benefits that are typically provided to full-time employees, some employers may push for independent contractor status when, in fact, the individual is really an employee. For this reason, the Internal Revenue Service (IRS) strictly monitors independent contractor relationships.

With all of the major tax differences involved, remedying a situation in which an employee has been incorrectly identified as an independent contractor can be very costly. Misclassified employees may be entitled to back pay, health insurance, pension plan contributions, and any other payments for which other employees were eligible. Employers may also be ordered to pay back taxes, interest, and penalties.

With the implications that come from making the mistake of classifying an employee as an independent contractor, employers need to be sure that when they enter into a 1099 (i.e., independent contractor) relationship that they treat the individual as such. Below are some tips to help you identify whether an individual is an independent contractor or an employee:

1. Level of freedom. An independent contractor enjoys the freedom to perform job tasks in any manner he or she wishes. The work of independent contractors is generally guided by professional or industry standards, as well as state, county, and federal codes. The work of employees, on the other hand, is usually managed by a supervisor and company protocol with directions about when, where, and how the work is to be performed.
2. At-will employment. In the absence of a written contract, employers are free to terminate (and employees are free to end) the employment relationship at any time for to any reason. However, in a 1099 arrangement, an independent contractor cannot be fired, nor can they resign, unless the terms of a contract are not fulfilled.
3. Benefit eligibility. Independent contractors are not entitled to traditional benefits offered to employees (i.e., health insurance, retirement plans, and paid time off). In addition, employers are not required to pay an independent contractor’s premiums for workers’ compensation or unemployment insurance as they are required to do for their employees.
4. Equipment. Employers are not required to provide equipment or material needed for an independent contractor to do his or her job; however, employers do provide a workspace, office supplies, computer, and other related equipment in order to enable an employee to perform their job duties.
5. Training. Employees are trained to perform their job duties in a certain way and as part of their job they may be required to participate in certain training programs and attend staff meetings. Independent contractors, on the other hand, perform job responsibilities their way and receive no training or direction from the company.

6. Business impact. The success of the business depends on the employees’ ability to perform their required job duties. In order to meet intended goals, employers typically coordinate an employee’s work with that of others. For a contractor, the success of the business isn’t dependent on the services provided and contractors don’t work with existing employees to get the job done.

7. Services. An employee does not make the services they provide for their employer available to the general public; however, contractors make their services available to everyone. They have their own offices, they hold business licenses and are listed in business directories.
8. Permanency. An employee typically continues to work for the same company year after year, whereas contractors are hired to complete a project and then they move on; there is no continuous relationship.
9. Where the work is done. An employee works on company premises or on a route or at a site designated by the employer. Contractors work off company premises and use their own workspace, office and equipment.
10. Agreements. Rarely do employers choose to enter into contracts with their employees; doing so may limit their ability to terminate the employee at-will should the contract guarantee employment for a certain period of time. Typically such agreements are only reserved for independent contractors and are known as 1099 agreements. These written contracts describe the relationship the parties intended to create and outline the services to be performed, the compensation that is to be paid, and the length of the project.

Because of the liability that can result from incorrectly classifying an employee as an independent contractor, businesses want to be extra cautious when entering into a 1099 relationship. A written agreement should be made that specifies the length of the project as well as how and when the contractor will be paid. In addition, employers should know their role – although limited - in the relationship. The same demands the company places on employees can’t be placed on independent contractors; they need to be given freedom to determine how, when, and where they perform their work.