Employee vs. Independent Contractor: Why Proper Classification Matters

Understanding the difference between an employee and an independent contractor is crucial for businesses of all sizes. Misclassifying a worker can lead to substantial legal and financial consequences, including fines, back taxes, and liability for unpaid benefits. Let’s do it the right way so your business can thrive!

Key Differences Between Employees and Independent Contractors

An employee typically works under the direction and control of the employer. The employer dictates when, where, and how the work is performed. Employees are usually entitled to benefits such as health insurance, overtime pay, and unemployment insurance, and employers are responsible for withholding income taxes and paying payroll taxes.

An independent contractor, on the other hand, is generally self-employed and operates under a contract to provide specific services. Contractors maintain control over how they complete their work, often provide their own tools or equipment, and are responsible for their own tax obligations.

Determining the Proper Classification

Courts and agencies such as the IRS and the Department of Labor consider several factors to determine proper classification. While several factors are considered, common tests include:

• Behavioral Control: Does the business control how the worker does their job?

• Financial Control: Does the worker have a significant investment in their tools and the ability to earn a profit or incur a loss?

• Relationship of the Parties: Is there a written contract? Are benefits provided? Is the relationship ongoing or for a specific project?

No single factor is determinative; the entire relationship must be analyzed.

Why It Matters

Incorrectly classifying an employee as an independent contractor can expose a business to unnecessary audits, penalties, back wages, and liability for unpaid taxes and benefits. Beyond legal risks, it can also impact worker morale and business reputation.

Employers should carefully review worker relationships and, when in doubt, seek legal guidance to ensure proper classification. Getting it right from the start protects your business and fosters fair workplace practices.

Need help reviewing your worker classifications? Contact our office to schedule a consultation.

(This article is provided for general information purposes and is not considered legal advice. Please contact our office if you would like counsel specific to your matter.)