Over the years advising business owners, we have been asked this question all of the time. What is the difference between an independent contractor and an employee? I have found that a majority of business owners are improperly classifying their employee or contractors, which could lead to serious trouble down the road. The question is answered by looking at substance over form, i.e. the actual job, not what is put on paper.

If you browse the IRS website, you will find that the IRS sets forth a general rule for defining an independent contractor. The IRS website states “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” This is a very broad definition and can be subject to interpretation. Further, the IRS site states “you are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.” Again, this can be subject to interpretation.

The IRS does use a test to determine if someone is classified correctly. It is often termed the “right-to-control test” because each factor, roughly 20 factors in total, is designed to evaluate who controls how work is performed. Under IRS rules and common-law doctrine, independent contractors control the manner and means by which contracted services, products, or results are achieved. The more control a company exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors.

A worker does not have to meet all 20 criteria to qualify as an employee or independent contractor, and no single factor is decisive in determining a worker's status. The individual circumstances of each case determine the weight IRS assigns different factors.

So as a business owner, how can you be sure that you are classifying your workers correctly to avoid any unforeseen legal issues? You must look at the facts of each situation, what the worker’s job actually consists of.  

Some of the factors to consider are: who directs the person’s work? Does he/she have a boss or work independently? Do you provide the equipment needed for the job or does the worker? Does the worker have a set schedule with set meal/break times or do they come and go as they please? How are they compensated? Do they have a written contract with a start and end date? Are any benefits provided to them? Are they required to report to someone or just provide a finished product?  

One example I like to use when trying to distinguish between an employee and an independent contractor is as follows: Let’s say you need your house painted. You hire a painter to do it. You tell the painter that they need to paint between 9:00am and 5:00pm, they can take an hour lunch and you will provide the supplies for the job. You will pay them for all hours worked. This painter will likely be deemed your employee. On the other hand, you hire a painter to paint your house. You pay $3,000 for labor and materials and only care that the job is complete in 2 weeks. This painter will likely be deemed a contractor. Please understand this is merely for examples sake and is in no way meant to opine on the painting profession.

As you can probably tell, this is a very gray area of the law, but one in which comes with high penalties if not handled properly. Whether you are employing independent contractors or employees is a factual question, a question that should be answered from the start to avoid long term trouble. Do not take this lightly. As a business owner, you should be working with competent legal counsel to help in the analysis and to save you money in the long run.

If you have any questions about this distinction, do not hesitate to reach out to us to schedule a free strategy session to ensure you are classifying your workers correctly. Click here to call now!