Employee or Independent Contractor? What Every Business Needs to Know
Many business owners believe the only difference between an employee and an independent contractor is paperwork, such as W-2 or 1099 forms. Misclassifying a worker exposes businesses to serious legal and financial consequences, including back taxes, unpaid wages and benefits, workers’ compensation claims, and lawsuits. One critical point is that the business and a worker cannot simply agree to call the worker an “independent contractor” just because it is convenient. The law looks at the actual working relationship to determine how a worker should be classified.
Knowing which classification, a worker falls into depends on several factors, including the industry of the employer. One of the most important questions for classification is “how much control does the business have over how the work gets done?”
An employer controls the work of an employee, and a business hires an independent contractor. The business owner defines the result, while the independent contractor decides how to get there.
The chart below breaks down the key factors that courts and agencies look at:
| Action | Employee | Independent Contractor |
|---|---|---|
| Direct and controlled tasks | Yes | No |
| Business success depends on worker | Yes | No |
| Required to work full or part time | Yes | No |
| Provide training | Yes | No |
| Provide benefits | Yes | No |
| Responsible for expenses accumulated on the job | No | Yes |
| Responsible for one’s own tools | No | Yes |
| Sets own hours | No | Yes |
| Paid by salary or per hour | Yes | No |
| Paid by project | No | Yes |
Here are the potential claims against a business:
- Unpaid minimum wage or overtime
- The Fair Labor Standards Act (FLSA) requires these for employees, not contractors.
- Unreimbursed work expenses
- Employees may be entitled to reimbursement for costs incurred on the job.
- Discrimination, harassment, or family leave violations
- Employees have specific legal protections in these areas.
- Unpaid payroll taxes
- Employers must withhold and pay Social Security and Medicare taxes for employees.
- Misclassification means those taxes may never have been paid.
- Health coverage penalties
- Employers above a certain size must offer health coverage to employees under the Affordable Care Act (ACA).
- Misclassified workers could trigger significant fines.
- Unpaid workers’ compensation
- Unpaid unemployment insurance premiums
- Penalties for failure to complete Form I-9
- Claims for unpaid benefits
Claims can come from multiple directions. For example, workers can file lawsuits directly and government agencies can launch their own investigations and impose penalties independently. Multiple government agencies can investigate claims that a business is violating the law, including the U.S. Department of Labor Wage and Hour.
