Independent Contractor vs Employee: What’s the Difference?

Tim also works for Company E providing landscaping services directly to them but uses his own mower and equipment to complete that work. Another determining factor is the fact that she doesn’t provide her services to the public, only to Company A. Based on the circumstances, Laura should be classified as an employee of Company A. Joyce charges Company A an hourly rate for her services and provides similar services to Companies B and C. There is a great deal of difference between an employee and an independent contractor in terms of compliance. And that’s how you ended up here, comparing the prospects of hiring an independent contractor versus an employee.

Legal Templates cannot and does not provide legal advice or legal representation. All information, software and services provided on the site are for informational purposes and self-help only and are not intended to be a substitute for a lawyer or professional legal advice. Legaltemplates.net is owned and operated by Resume Technologies Limited, London with offices in London United Kingdom. You have few restrictions or limitations on what you can assign to the employee or about your ability to terminate the employee without paying out a contract. That’s part of why highly collaborative work tends to be done by employees—because you can mandate they come into the office and work the same hours as the rest of your team.

Employment Status

And as remote work becomes ever more popular, new talent markets are opening up all over the globe. Raina Chou creates data-driven articles about the most pressing legal issues in the U.S., combining legal insights with a sharp understanding of users’ needs. 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.

• And once your status is determined, state law may require an employer to provide things like workers’ compensation insurance, fair labor practices, unemployment insurance and more.
• Because independent contractors are their own business entity, it is up to them to decide how, when, and where they complete the work outlined in their contract.
• Take the time to absorb the various distinctions and revisit our independent contractor vs. employee chart if you need to refresh your memory.
• Once the project is complete, the independent contractor moves on to their next job.
• You can input the specific benefits you plan to provide along with base pay to determine roughly how much that plan would cost you.
• Arriving early in the morning, unlocking the front door of your shop, and welcoming customers throughout the day?

This has changed dramatically, especially over the past five to ten years as the “gig economy” has taken off and employers are relying more and more on independent contractors instead of employees. While such use can provide a lot of benefits, independent contractor vs employee pros and cons it also presents a lot of risks and small business lawyers are at the forefront of helping companies mitigate these risks. Fortunately, Practical Law provides a lot of resources to aid in-house lawyers in this responsibility.

Classifying Workers

And most independent contractors are very satisfied with the flexibility and creativity their career path affords. Many states use a three-factor “ABC” test, though each state’s law varies, sometimes substantially. The IRS uses an 11-factor test based largely on the ability of the company to direct and control the worker as they perform their duties.

• Every state has its own set of tests to determine if you’re an employee or a contractor.
• Both types of team members have advantages and disadvantages, so evaluating your business’ specific needs and goals is essential.
• Significant legal penalties exist for misclassifying workers to avoid paying for full-time employee benefits.
• If you can’t handle a task yourself, you can delegate it to a hired pro, available in your Slack.
• One of the biggest benefits of independent talent is the ability to re-engage them for future needs.

The hiring game is tough right now, so this is good news for employees. Rather than focusing on building a workforce of traditional, long-term employment, a blended workforce that includes independent talent can truly give enterprises a competitive upper hand. A misclassified employee can also result in financial claims including reimbursement for overtime, retirement contributions, or social security contributions, amongst other benefits.

Tools, equipment, and resources

Organizations found intentionally misclassifying employees as independent contractors in Australia may face fines of up to $93,900 per violation. For example, if an employer reimburses a worker for a particular tool the worker purchased to complete the delegated tasks, the worker is likely an employee. Although an increasing number of businesses are willing to reimburse freelancers for some expenses, most freelancers prefer to pick their own tools and obtain them with their own resources.

• Please reference the Terms of Use and the Supplemental Terms for specific information related to your state.
• Using an independent contractor for a project rather than investing the time to hire an employee with the same skills, simply makes more sense for many companies.
• As mentioned, contractors are self-employed individuals, so you don’t need to own a legal entity or use an EOR to work with one.
• On the other hand, employers do not owe correctly classified contractors the same entitlements as full-time employees.
• As you might expect, there are also significant differences in training and onboarding between independent contractors and employees.
• Independent contractors are free to decide on their work hours, rates, and methods, while employees are subject to stricter requirements imposed by the employer.
• As a result, businesses can save 20-30% by hiring independent contractors over full-time employees.