Independent contractors offer a unique skill set to companies, and in exchange, employers save money on labor costs while creating a competitive advantage. However, the employer-independent contractor relationship must follow specific federal rules and may be subject to further state regulations.
The information below contains everything you should know about hiring or working as an independent contractor:
What is an Independent Contractor?
An independent contractor is self-employed individual. They generally function as an entity contracted to offer specialized services as a nonemployee. An independent contractor agreement sets the terms and conditions of the business relationship between the company client and the contracting service provider.
The rights of an independent contractor are essential for employers to honor and recognize, including:
- Right to contract
- Right to advertise
- Right to challenge employment status
- Right to control
- Right to make decisions
- Right to manage own a business
- Right to receive payment
- Right to work at will
- Right to work location
- Right to work with others
Violating the above-referenced rights can leave employers on the hook for expensive fines and penalties. Regardless of your position, it is critical to recognize these rights and incorporate them into your independent contractor agreements as a matter of practice and formality.
Here is an article that also defines independent contractors.
What Does It Mean To Hire Someone As an Independent Contractor?
Being hired as an independent contractor is when a company employs someone under contract to perform a specific service. However, employers shouldn’t classify independent contractors as employees since they operate as distinct entities, including sole proprietorships and LLCs . Independent contractors can perform various functions involving specialized tasks beyond the scope of the client’s ordinary course of business.
Both parties generally have an independent contractor agreement to govern their relationship, contrasting with private employment. It’s wise for independent contractors to utilize contracts with clients routinely. They allow you to establish relevant and vital terms and conditions, such as when the work period ends, what happens if one party wishes to terminate, and what happens if one party cannot fulfill their duties.
Independent Contractors vs. Employees
Independent contractors provide businesses with flexibility when it comes to staffing. Depending on the client’s needs or the sales volume, they can engage contractors for a specific period while saving time and money in some situations. On the other hand, employees are more expensive with less termination flexibility.
Below, check out additional differences between independent contractors vs. employees:
Difference 1. Location & Hours
In general, contractors decide when, where, and how they work. The location of their work depends on the schedules and demands of their other clients. You do not have to provide an assigned office or designated workspace for contractors.
The work schedule they follow isn’t necessarily traditional either. The type of work or service provided may require independent contractors to work longer hours, including nights and weekends.
Traditionally, employees work at your business location during certain hours or shifts. If they exceed those usual hours, they will earn overtime pay. They will work from dedicated offices or space provided by you.
Difference 2. Control
Independent contractors perform work independently and free from managerial control. It is common for a company to hire contractors for their expertise based on training and experience alone. As such, there is no obligation to train an independent contractor.
In contrast to independent contractors, you have the right to supervise them more closely and require their adherence to internal company policies. Employees are also more likely to have open-ended job descriptions within a specific role.
Difference 3. Resources & Compensation
Contracts or professional service agreements define how much you pay contractors for their services. Payments don’t happen regularly like a salary but upon completion of milestones or stages. Client’s don’t make tax deductions and pay the independent contractor like they would any other invoice.
Clients seldom reimburse independent contractors for expenses such as work clothes, fuel, lunch, or meals. They typically purchase their supplies independently. Contractors also don’t receive paid employment benefits unless they furnish a separate policy.
Employees don’t pay for things like uniforms, supplies, and tools. Instead, the employer is generally responsible for supplying these items. An employer must pay an employee by the hour or as a salaried person and offer them benefits as required under federal and state labor laws.
Difference 4. Employment Laws
Across the United States, law and regulation regulate the employment of employees, including minimum wage, anti-discrimination, and overtime laws. The employee-employer regulatory system generally does not cover independent contractors.
However, employers cannot treat independent contractors like employees. Misclassification of personnel is a significant issue in the US, and infractions can severely punish employers.
For example, California State requires that employers use an ABC Test to determine if an employee is an independent contractor. The ABC Test asks three essential questions as follows:
- Is the worker free from control?
- Does the worker offer services beyond the normal scope of business?
- Is the worker permitted to offer services to others?
If the employer answers “Yes,” to these questions, they must classify the employee as an independent contractor. If they answer “No,” then they must reclassify the independent contractor as an employee. They may also owe misclassified workers benefits and backpay.
Here is an articles that discusses the diffeneces between an independent contractor vs. employee .
What qualifies as a 1099 Employee?
A 1099 employee is an independent contractor, such as freelancers, contractors, and gig workers. We call them “1099 employees” because companies must issue a 1099-MISC tax form to them annually. A written contract usually defines the specific tasks or projects that these workers are hired to accomplish.
Employers must treat 1099 employees just like independent contractors, including freedom from managerial control, the ability to set work hours, and more. A tax attorney can help you generate the legal documents necessary for managing 1099 employees.
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Examples of Independent Contractors
According to the IRS, you are not an independent contractor if the employer can control the services you perform. Independent contractors are incredibly prevalent in the construction, marketing, technology, and trade industries.
Here is an example of how an independent contractor relationship works:
- Katherine offers services as a web designer in her area
- KLM & Co. needs to hire a web designer for a new company website
- It doesn’t make sense for KLM to hire a private employee for this project
- KLM eventually connects with Katherine and review her proposal
- KLM decides to hire Katherine as an independent contractor for the website
- Katherine drafts an independent contractor agreement and produces it
- Both parties finalize the agreement by signing it
- Katherine performs services from her home as described in the contract
- KLM works in good faith by allowing Katherine to complete the work
- Upon final approval, Katherine submits an invoice to KLM
- KLM receives the invoice and pays it
- Unless KLM hires Katherine for more work, the project concludes
Workers with special skills are frequently self-employed, seeking independent work instead of private employment. Many doctors, lawyers, dentists, and other professionals who provide services to the public are often self-employed. Freelance writers also work as independent contractors.
Get Help With Employment Issues
Several legal issues are surrounding employer-independent contract relationships. As such, legal advice and guidance can help you navigate the associated complexities. Employment lawyers can answer questions and draft independent contractor agreements that are practical for your situation. Post a project for free to get bids from vetted lawyers to help.