In March 2020, the global pandemic changed the essence of the workplace as we once knew it. Individuals who once worked as employees began to rethink the terms of their employment status and ultimately chose the flexibility of working as independent contractors. Whether these individuals reinvented their work status by establishing their consulting firms, creating their own online companies, or driving for shared ride services, these workers effectively changed the perception of the standard work model.
The Differences Between Independent Contractors and Employees
Employers engage the services of independent contractors when they need experienced and talented individuals to work on specific projects for a defined period of time. Acquiring the expertise of an independent contractor also allows the employer to avoid having to incur many of the expenses associated with onboarding a new employee. These expenses include taxes, benefits, overtime pay, unemployment insurance, workers’ compensation insurance, FMLA, training, and matching contributions to the company’s retirement plan.
What is an Independent Contractor vs. an Employee?
According to the IRS and the Fair Labor Standards Act, the difference between an employee and independent contractor status consists of three primary points. These include financial control, behavioral control, and the nature of the professional relationship. Also according to federal law, an independent contractor is a non-employee who agrees to work for a company in exchange for compensation. The company’s agreement with an independent contractor is predicated on the assumption that the worker is self-directed and not controlled by the company paying for their services. Conversely, an employee is a worker hired by the company to perform specific functions during specific hours and at a particular location. The company defines when, where, and how employees carry out their duties. A good test is determining if the contractor is doing identical work for other companies.
In the State of Texas, the primary difference between an employee and an independent contractor also depends on the level of control exercised by the employer. Employers generally have more control over an employee’s schedule and very little control over the activities of an independent contractor. While employees must generally accept the employer’s terms of employment, an independent contractor can negotiate the details of their professional contract. The Texas Workforce Commission says more about their evaluation here.
Independent Contractors vs. Employees
When a company hires an employee, the employee will generally:
- Work within the time frame specified by the employer.
- Work at a location defined by the employer.
- Work exclusively for the employer.
- Take specific training courses designed and paid for by the employer.
- Use the employer’s equipment, tools, and resources.
- Receive a salary or hourly wage that is subject to tax deductions.
- Receive benefits, such as health insurance, PTO, etc.
- The employer must comply with state and federal laws regarding overtime, minimum wage, and employment discrimination issues.
When a company engages the services of an independent contractor, the independent contractor will generally:
- Work on a specific project
- Work within an agreed time frame.
- Work from a location of their choosing.
- Work for multiple clients.
- Use their tools and resources.
- Submit invoices for work completed.
- Be responsible for paying their taxes.
Advantages and Disadvantages
Independent Contractors
Advantages
- Saves the company money. Although independent contractors usually charge more, employers often save money by not paying for the salary benefits of full-time employees.
- Greater flexibility. Employers can quickly terminate an independent contractor’s contract once the project has concluded.
- Reduced liability: Employers are not legally obligated to protect contractors from discrimination.
Disadvantages
- Less control. Contractors typically operate independently. They define their schedules and decide what equipment they need, what processes they will follow, and what the project timeline will look like.
- Increased health and safety liability. Having a contractor on your premises can be risky because your insurance will only cover work-related accidents for your employees. If a contractor has, for example, a slip and fall incident on your premises, a non-employee can sue for damages if they can prove the company was negligent.
- Temporary relationship. Contractors generally have less loyalty to the company than an employee.
Employees
Advantages
- Increased loyalty. Employees often have a more significant commitment to the employer and the company. These workers are more likely to remain employed and support you and the organization as the business grows.
- Brand ambassadors. Happy employees are an organization’s best brand ambassadors. Workers who feel valued are generally more loyal and invested in your business than independent contractors. Employees are more inclined to promote the company they work for because it is in their best interests to support their employer’s growth, development, and profitability.
Disadvantages
- Less flexibility. When you hire independent contractors, you can adjust your workforce according to current needs. If you are experiencing a period of growth, you can take on more contractors. You can also allow the contract to expire if you reach a plateau. However, when you hire an employee, you cannot terminate their employment just because you are experiencing a slow month.
- Additional expenses. Hiring an employee entails other costs that include taxes and employee benefits.
Employers Must Comply with Government Regulations
All levels of government prefer employees over contractors. Due to the risks inherent in worker misclassification, employers must ensure that they engage in professional relationships with independent contractors according to state and federal laws. Employers should implement a company-wide classification process that defines the necessary policies for hiring and managing a disconnected workforce. Employers should also ensure that their management team follows government regulations and understands the principal differences between employees and independent contractors. The U.S. Department of Labor regularly audits businesses to ensure compliance in this area, and the misclassification of independent contractors can result in fines and penalties.
Employers Must Be Careful Not to Misclassify Their Workers
Independent contractors have the responsibility to handle their tax and accounting obligations. When workers are classified as employees, the employer must pay all the expenses associated with payroll taxes, overtime wages, unemployment benefits, FLMA, and workers’ compensation. When employees are misclassified as independent contractors, aggrieved workers may have legal grounds to file a claim against the organization. In these circumstances, the company could be held liable to pay for the misclassified contractors:
· Employment Taxes
· Back Wages
· Overtime
· Unemployment Insurance Claims
· Workers’ Compensation Claims
· Violations of FMLA Claims (involving benefits.)
In some cases, contractors may even have grounds to file class action claims against the organization.
Before a Company Hires an Independent Contractor
Before an organization engages in an independent contractor’s services, the company should create a company policy that defines the terms of its professional relationship with a contractor. The policy should include the following:
- Establish a company policy that defines how the company will engage independent contractors.
- Ensure the management team is aware of the company policy.
- Create a process to ensure the company does not treat the contractor as an employee.
- Create and issue an independent contractor agreement that establishes the terms of the professional engagement.
- Comply with all federal and state laws regarding the independent contractor relationship.
Create an Independent Contractor Agreement.
An Independent Contractor Agreement will define the terms of the professional arrangement between the independent contractor and the company. The agreement will generally include the following:
- Names of Parties Involved.
- Project Description
- Deadlines and Deliverables
- Payment and Billing Information
- Project Terms
- Confidentiality
- Non-Solicitation
- Dispute Resolution Clauses
Working with a Labor and Employment Attorney Can Mitigate Misclassification Risk
Attorney Natalie Lynch and her team at Treaty Oak have significant experience in assisting organizations in complying with state and federal regulations.
Working with a group of experienced labor and employment attorneys can help you navigate the complexities associated with employment classification processes and procedures. We can also assist you with the creation of an independent contractor agreement that is customized to your organization. Contact Treaty Oak to arrange for a complimentary consultation.
Contact Treaty Oak to Schedule a Free Consultation Now
Labor and employment matters arise in all types of businesses and industries. Treaty Oak’s team of attorneys is equipped with the resources, experience, and knowledge to help you resolve your legal matter. In addition to representing individuals and businesses in various labor and employment issues, we can assist you in developing employment contracts, employee handbooks, and performance evaluation materials and drafting legal agreements to address problems that include non-disclosure, non-competition, severance, and separation.
Treaty Oak’s Clients Include:
- Individuals
- Limited Liability Companies
- Corporations
- Limited partnerships
- Sole proprietorships
- Family businesses
- Investors
- Beneficiaries
- Vendors
- Suppliers
- Consultants
- Professionals
- Government Entities
If you are an employer working to resolve a labor and employment dispute, protect yourself, your employees, and your business by contacting us at Treaty Oak. Our lawyers can help you navigate the complexities of your legal dispute from inception to resolution. If you have questions about a legal matter or are involved in a labor or employment dispute, contact us for help now. Email us or call 512 298 2346.
