Business Law 101: The Difference Between Contractors and Employees
When running a company, it is critical to find the right team of people to help make the business succeed. Employees and independent contractors are two of the most common types of workers, and while they can often perform similar tasks, they are quite different from a legal perspective. Understanding the difference between contractors and employees will help ensure you classify everyone working for the company correctly and avoid potentially large fines and penalties.
Level of Control Over the Employee
While both contractors and employees will have supervision from the company, the level of control imposed is often going to be quite different. Employees will be provided with all the tools and systems they need to perform their job, but contractors often need to bring in their own. Contractors also usually have more freedom in how they decide to complete their assigned tasks since they are typically brought in to perform specific work that they specialize in.
Taxes are one of the biggest areas where there is a difference between contractors and employees. The business needs to cover half of the Medicare tax for employees. With contractors, however, it is not covered at all. The company will also have to pay unemployment insurance for most types of employees, but that is not the case for contractors.
In most cases, employees are paid a set amount per hour or week and can expect to receive that amount of money until they quit or get fired, or until they receive a raise or promotion. With contractors, on the other hand, the pay is often based on a specific job or project. Whether the job takes one day or one week, their pay will be the same. Even for longer-term projects, the contractor can’t expect to remain working for the same company indefinitely.
Dedication to the Company
Employers can restrict their employees’ ability to work other jobs (for example having a second job after business hours) if they feel that it would conflict with the best interests of the business. When it comes to contractors, however, that is not possible. In many cases, contractors are expected to be performing work for a variety of different businesses if they would like to get more hours than is provided by your company.
Classifying Workers Correctly
Based on the business’s needs, it’s likely fairly clear whether a worker should be an employee or a contractor. However, since staffing businesses can be complex, the lines can become somewhat blurred. If you misclassify workers, it can cost you thousands of dollars in fines and penalties, so it is important to make the right decisions when adding people to your team. If you aren’t sure how to classify a worker, or you’ve been charged with a violation related to worker classification, please contact Maxwell Dunn Law to schedule a consultation right away.See all videos