The Internal Revenue Service (IRS) maintains a set of factors that differentiate an employee from an independent contractor. This is an important distinction for a few reasons. One reason is that employees have certain rights that independent contractors do not have, like the right to earn overtime pay and the right to take unpaid leave under the Family and Medical Leave Act of 1993. Another reason is that employees and independent contractors are taxed differently. Employers withhold Medicare, Social Security, unemployment, and income taxes from their employees, whereas independent contractors do not pay these taxes. Instead, independent contractors pay self-employment taxes.
When an employee is misclassified as an independent contractor, he or she can face rights violations and financial repercussions. If you feel you are misclassified, discuss your case with an experienced employment lawyer to determine the most productive course of action to take. Below are the factors that separate an employee from an independent contractor. They fall into three primary categories:
In short, an individual is an employee if his or her employer has the right to direct when and how his or her work is performed. These factors include:
- The degree of instruction the worker receives to perform work. This includes ongoing, periodic training;
- The evaluation systems in place to measure the worker’s progress and performance; and
- The type of instructions given, such as which tools to use and where to perform the work.
When the employer maintains financial control of an individual’s work, that individual is an employee. Financial factors that determine a worker’s classification include:
Whether the worker has the opportunity for profit or loss when performing work, rather than simply being paid for his or her time; Whether the worker incurs unreimbursed costs;Which party invested in the cost of the equipment used for the job. Typically, independent contractors purchase their own tools, whereas employers purchase the tools their employees use; Whether the worker’s services are available to the market as a whole while working with the company; andHow the worker is paid. Employees generally earn a salary or hourly wage, whereas independent contractors charge by the project or bill by the hour.
Relationship Between the Parties
A relationship between an employer and employee is quite different from the relationship between a client and a contractor. Factors that define this relationship include:
- The language in the worker’s contract that defines the relationship between the parties and the worker’s classification;
- The extent to which the worker’s services are key to the company’s ongoing operation;
- The permanence of the relationship. Employees are generally hired for indefinite periods, whereas contractors are hired for specific projects or time periods; and
- Whether the company provides the worker with benefits like healthcare insurance, vacation time, and paid sick days.
Work with an Experienced Employment Lawyer
Our team of employment lawyers at Moen Sheehan Meyer, Ltd. are advocates for working people. If you think you were misclassified or experienced another rights violation in the workplace, contact our office to schedule a consultation where we can discuss your case in greater detail.