Employee or Independent Contractor: What Difference Does It Make?
Hilliary Clinton famously asked, "What difference does it make?" Well, as far as the independent contractor versus employee distinction, it makes a big difference. You’re not entitled to be paid a minimum wage, overtime, etc., unless you are an employee. So, the first question we must address is whether or not you are an employee.
The employment relationship is a contractual agreement between your employer and you. According to both state and federal law, workers who are economically dependent on the business of the employer are considered to be employees and most workers are considered to be employees.
Employers sometimes try to avoid the liabilities and responsibilities of being an employer by mischaracterizing workers as independent contractors. This is a big deal because independent contractors are not eligible for the protections of state and federal wage laws.
There is no minimum wage, overtime, rest breaks, meal periods, etc., for independent contractors, because independent contractors don’t work for an employer per se. Rather, independent contractors are in business for themselves.
For some of you, it may be unclear whether you are an employee or an independent contractor—especially if you are a broker, advisor, salesperson, a delivery or car service driver, home worker or work for tips or commissions.
There are number of factors the courts and regulators consider in the determination of whether an individual is an independent contractor in business for himself or herself, or an employee who is economically dependent on an employer who can require employees to work and prevent employees from working. There is no single determinative factor. Rather, courts look at all facts relevant to the relationship between the worker and the employer.
The factors can vary and no set of factors is exclusive, but these are generally the key factors in determining whether an employment relationship exists:
1. The extent to which the work performed is an integral part of the employer’s business. If the work is integral to the employer’s business, it is more likely the worker is economically dependent and less likely the worker is in business for himself or herself. Work is integral to the employer’s business if it is part of its production process or if it is a service the employer is in business to provide.
2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss. This may be indicated by the hiring and supervision of workers or by investing in equipment, and whether the worker’s managerial skills affect his or her profit or loss.
3. The relative investment in facilities and equipment by the worker and the employer. The worker must make some investment and bear some risk for a loss in order for there to be an indication he or she is an independent contractor.
4. The worker’s skill and initiative. An independent contractor is typically skilled and exercises independent business judgment. These workers take initiative to operate as independent businesses, as opposed to employees who are economically dependent.
5. The permanency of the relationship. A permanent or indefinite relationship indicates the worker is an employee, as opposed to an independent contractor.
6. The nature and degree of control by the employer. This factor includes who sets the amount of pay and hours of work, and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers. An independent contractor generally works free from the control of the employer.
The one factor that is not so relevant in determining the existence of an independent contractor relationship is a written agreement. The fact that a worker has signed an “independent contractor agreement” is not controlling because the actual facts of the working relationship—not a label—determine the nature of the relationship.
The bottom line is that whether you are an employee or an independent contractor makes a huge difference. Employers prefer independent contractor status because they don’t have to provide vacation pay, sick time, personal leave, or any life, health or unemployment insurance. In addition, there is no basis for workers’ compensation suits, and taxes do not have to be withheld. Finally, there are no minimum wages, maximum hours, overtime, rest breaks and meal periods. All of those unpaid benefits and wages add up to a lot of money. Thus, there is a huge incentive—a lot of money in the employer’s pockets—to mischaracterize employees as independent contractors. It’s one of the devious tactics of the great wage robbery.