Companies often choose between a mix of hiring employees and retaining independent contractors to perform the work they need done. It is critical that the relationship be classified correctly to avoid costly mistakes. If an employee is incorrectly classified as an independent contractor, the company may be exposed to significant liability while the individual loses employment-related benefits.
What are the main differences between an independent contractor and an employee?
There are a few main differences when it comes to independent contractor versus an employee. The most significant differences include the degree of control of the company; manner the person is paid; taxes; and benefits and protections afforded to the individual.
Degree of control
One of the biggest differences between an independent contractor and an employee is the degree of control the company has over the person. A company routinely has near-total control over an employee and how he/she performs the job; whereas, the company has very little control over the independent contractor. The independent contractor is expected to know how the particular task or job is to be performed and come prepared with their own tools and know-how to perform the job. The employee, on the other hand, will be given the tools to perform the job and told how and when to perform the job. In most situations, the independent contractor will have his/her own business that contracts with the company.
Employees are paid salary or regular wage. This is typically done where an employer sets the hours the employee is expected to work and determines the hourly pay rate or salary. Independent contractors are typically paid per project or per invoice. For example, if a company hires an independent contractor to create a logo for them, the contractor may state they are to be paid a flat-rate sum of money to create that logo. Compare that to the logo company who employs an individual to create the logo. That employee is paid their regular rate of pay and benefits to create the logo regardless of the agreement between the customer and the logo company.
For employees, taxes are withheld by the company/employer, which is reflected on each paystub. Taxes are withheld from each paycheck for Social Security, Medicare, and State taxes. For independent contractors, the contractor (not the company) is responsible for addressing all tax consequences from the payments it receives.
Under various employment laws, employees are considered as having more protections and benefits. This includes things like unemployment benefits, worker’s compensation, the right to a minimum wage, overtime pay, and sick pay. Independent contractors are not employees, and therefore many of these protections or benefits do not apply to them.
Why do employers misclassify employees or independent contractors?
Most companies do not intend to misclassify employees as independent contractors. Sometimes, employers just don’t understand why a person should be considered an employee as opposed to an independent contractor. However, there are some cases where a company intentionally misclassifies an employee. They may do this to avoid providing benefits, overtime pay, or so they do not have to pay part of that employee’s taxes. These actions can have serious implications for the company and employee alike.
What to do if you’ve been misclassified
If you feel you have been misclassified as an independent contractor instead of an employee, the first thing you should do is talk to your employer. This may help provide clarity into why you were classified as an independent contractor. This may also help the company review your classification and reclassify you if you were indeed misclassified. If your employer refuses to review your situation, you may consider contacting an attorney or governmental agency to determine the correct employment status.
What a company should do if they have misclassified employees
If a company determines that it had misclassified an employee as an independent contractor, it should immediately reclassify the person to the correct status and compensate the person for any lost pay and benefits. The company also should review payments to governmental agencies and determine whether other payments must be made including, but not limited to, unemployment compensation insurance, worker’s compensation, and taxes.
If the company is unsure of the classification that should be made, it would be well advised to speak with a knowledgeable employment lawyer. Misclassifications can be complex and costly. The attorneys at McDonald & Kloth, LLC can help you by reviewing the specific case and circumstances, making a determination of what the classification should be, and offering corrective steps in the matter. Contact us today at 262-252-9122.