Independent Contractor Law
Working as an independent contractor, also known as a ‘contractor’ or ‘IC’, provides you with additional freedom that most employees do not get to experience. However, it is important to understand contractor law since these benefits do not come without legal issues and responsibilities, including those that fall on your and your client’s shoulders.
There are specific independent contractor rules and regulations that both parties must follow, which means that having an agreement in place is vital to your success. As an independent contractor, you have rights, and it is crucial to protect them since a misclassification of your employment can lead to more problems down the road.
What Is an Independent Contractor?
An independent contractor is a business or person that contracts with another company to perform specific services as a non-employee. Independent contractors have direction over the work produced while remaining free from managerial control. An independent contractor’s only expectation is to deliver on the end-product or results.
Independent Contractor vs. Employee
While employees may not notice any differences between themselves and contractors, there are significant legal differences applicable to independent contractor vs. employee designations. These differences typically extend beyond the job title and revolve around taxation, wages, benefits, and authority.
Before accepting a role as an independent contractor, consider the following differences in these types of employment :
- Independent contractors: Independent contractors are liable for paying their taxes and benefits. They work where and when they want without having to take managerial direction. The IRS designates them as self-employed, which means that they have to pay self-employment taxes.
- Employees: Employees receive wages, benefits and pay taxes from their paycheck. Their employers have full managerial control over the work that their employees complete, including a regular schedule, designated location, and company-specific training. Full-time employees receive more benefits and protections than part-time ones. Employers also pay payroll taxes on their wages.
As such, there are several significant differences between independent contractors and employees. The primary difference occurs in the level of control that companies exert over your work. If you are not an employee, an independent contractor agreement can prevent disputes from arising in the future.
Potential Issues Around Misclassification of Independent Contractors
When you work with a company as an IC, several laws and rights protect you from the potential issues around misclassification . There is no singular definition of an independent contractor, which means that the system can be abused by companies trying to reduce their payroll costs. While there are steep penalties on the line for employers, including fines, litigation, and settlements, misclassification of your employment status significantly affects you, too.
These most significant financial and legal issues that misclassified ICs face includes:
- Paying too much for self-employment and income taxes
- Not receiving benefits other employees receive
- Taking unnecessary managerial direction and control
- Giving unlawful organizations an unfair competitive advantage
- Not receiving mandated employee protections
- And other legal issues as applicable
The misclassification of independent contractors can take several forms. Legitimate businesses do not engage in these practices and seek to proactively remain compliant with all applicable rules and regulations at the city, county, state, and federal levels.
You have a specialized skill and a vested interest in your business that helps you earn a profit. Independent contractors should not have to pay more money or endure restricted freedoms because an unsavory company wants to reduce legitimate business expenses.
List of Independent Contractor Rights
As an independent contractor, familiarizing yourself with your rights is critical to ensure that you comply with the law and that companies are not getting away with treating you like an employee. Understanding your responsibilities also means that you will better manage your business without paying unnecessary taxes or working longer hours than necessary.
Independent contractor rights are as follows:
- RIGHT #1: Right to enter into a contract
- RIGHT #2: Right to make decisions and exert control over your work
- RIGHT #3: Right to work where and when you want
- RIGHT #4: Right to advertise and sell
- RIGHT #5: Right to receive compensation
- RIGHT #6: Right to contract with others
It is equally important to recognize that numerous state and federal laws apply to your business. Ultimately, you have the right to operate like any other with specific limitations regarding how much control your client has over the process. Speak with a business attorney if you have questions about your rights in this capacity.
Federal Laws for Independent Contractors
Government agencies and departments, like the Internal Revenue Service (IRS) and Department of Labor (DOL), oversee laws and regulations regarding independent contractors and employers. The IRS handles taxation while the DOL determines classification.
Determining whether you should be designated as an independent contractor or employee depends upon core factors of common law rules :
- RULE #1: The degree and nature of control you have over the work you produce
- RULE #2: The degree of your opportunity to earn a profit or incur a loss
- RULE #3: The types of employment contracts involved, if any
There are other factors that federal laws consider, including the specialization of your skills, length of the relationship, and more. As you can see, these rules not only help you assert your rights but also simultaneously stress the importance of having a well-defined independent contractor agreement to avoid future problems.
Image via Pexels by Tima Miroshnichenko
Independent Contractor Laws By State
In addition to federal laws, state-specific laws may designate you an employee, even if you believe you are working as an IC. Some states, such as California, Virginia, and New Jersey, have more stringent rules related to employee and independent contractor classifications.
These states use a three-prong test, sometimes known as an ABC test, which considers you to be an employee unless the following factors apply:
- TEST #1: You are free from managerial direction and control
- TEST #2: You provide services to your client that are not within their normal scope of business offerings
- TEST #3: You are routinely engaged as a business performing the same services for every client
If you meet the three elements above-referenced, then you are an independent contractor. Ensure that you are protecting your rights and meeting your obligations when this designation is proper for your business or employment status.
Protecting Yourself as an Independent Contractor
Now that you understand your rights, you can take steps to take right now to legally and financially protecting yourself as an IC. It is vital to remain proactive in your duties to avoid potential legal issues in the future. Communication is essential to facilitating this process.
Five tips to protecting yourself as an independent contractor:
- TIP #1: Maintain financial and business records for at least seven (7) years in case disputes or questions arise
- TIP #2: Consider establishing a limited liability company (LLC) to separate your finances
- TIP #3: Get a professional liability insurance policy to protect you against litigation
- TIP #4: Have an independent contractor agreement in place to ensure that you and your client have reached a mutual understanding
- TIP #5: Routinely work with a business lawyer to advise you of legal issues
An independent contractor has a different relationship with a business than that of an employee. In general, the scope and depth of your work determine how you should be treated, and you are well within reason to assert your rights if they are violated.
Drafting an independent contractor agreement beforehand is smart when approaching and formalizing relationships with clients to mitigate problems. Get started with ContractsCounsel and create a project posting today at no cost.