Employment regulations put a lot of pressure on organizations in both operational and financial ways. Companies have to proactively protect workers against harassment and discrimination. They have to ensure compliance with payroll regulations and workplace safety laws. They may have to provide certain benefits, which can drastically increase the cost of each new employee they hire.
In some cases, companies need talent but cannot necessarily afford onboarding a new full-time employee. In such scenarios, they may want to hire workers as independent contractors rather than direct-hire employees. The difference between these two classifications involves more than just the use of a W-2 or 1099 during the hiring process. If workers later claim that a company misclassified them to avoid tax obligations and pay regulations, the organization could face wage lawsuits and possibly tax consequences as well.
What differentiates an employee from an independent contractor?
Control over the job
The federal government identifies multiple distinct characteristics that separate employees from independent contractors. One of the most important has to do with the degree of oversight the company provides. Independent contractors should work in a truly independent fashion. They can pick what projects they work on and what hours they work. Employees are subject to the company’s requirements.
Additionally, independent contractors typically provide their own equipment, while employees rely on equipment provided by employers. They have a personal opportunity for profit or loss, while employees largely let their employers take risk of losses and benefit from successful projects.
The importance of their position
Another key factor that separates an independent contractor from an employee is whether or not the job they perform is intrinsic to the company’s function. A construction company may hire professionals to perform small amounts of drywall or tiling work because they don’t need full-time support in those areas.
While those tasks do relate to the company’s overall function, they are not the main focus of the business’s operations. On the other hand, if the company provides bespoke software, the people developing the company’s flagship programs or applications may very well be employees regardless of how the company attempts to classify them. The permanence of the position, as well as the skill and initiative of a worker also factor into their classification.
Understanding how employment laws separate contractors from employees can help organizations avoid expensive claims of misclassification. Companies that hire independent contractors need to ensure their classification is appropriate and that their contracts protect the company’s interests.