Are You an Independent Contractor or an Employee?
Confused about your work status? Protect your rights by learning the difference
Does your company refer to you as an “independent contractor,” even though you’re required to attend company meetings, work specific hours at specific locations or use your company’s assistants rather than your own?
If so, the company may need to reclassify you as an employee. State studies show that up to one in five companies make a mistake by misclassifying at least one worker as an independent contractor, according to a study by the Economic Policy Insitute.
Why are the distinctions so crucial? As a contractor, you can enjoy more freedom in your work life, but as an employee, you’re protected by a boatload of labor laws. This includes laws overseeing your employment contract, your salary or wages and your right to unemployment and workers’ compensation insurance, according to the Employment Law Center.
There’s a lot of money riding on those distinctions. The ride-sharing service Uber claims its drivers are independent contractors, and several states have ruled in the company's favor. But the California Labor Commission recently ruled that, based on working conditions, drivers working for Uber are actually employees. It ordered Uber to reimburse a driver in question for $4,152.20 in expenses and other costs for the estimated eight weeks she worked for the company in 2014.
Here’s a guide to figuring out which group you fall into under the law:
Control over scheduling. If you’re a contractor, you have the right to set your own hours and use your own tools. For your client, the results are what counts. The Internal Revenue Service (IRS) has a vested interest in whether you’re an employee or contractor, since that determines how your taxes are paid. And according to the IRS, you may actually be an employee if the company that you work for tells how you to go about doing your job, such as:
- Giving you extensive training or instructions on how to do the job, instead of letting you develop your own set of procedures.
- Telling you where to purchase supplies or which tools or assistants to use, instead of letting you run your own business.
- Scheduling you to work certain hours at a certain location, rather than allowing you to decide on your own hours and workplace.
Clients and investment. Is your client pressuring you to work exclusively for him or her? If you’re a contractor, that’s a no-no, since you have the flexibility to run your business as you see fit. The IRS and Employment Law Center say that as a contractor:
- You can work for as many clients as you like and advertise your services to the general public. A client cannot require that you work for them exclusively (but if you’re an employee, your company can require that).
- You can invest as much money as you want into your business or workplace, and earn a profit (or suffer a loss) based on your business decisions. Employees generally work for a set wage.
Compensation. As a contractor, you generally receive payment only for your services. According to the Employment Law Center and the IRS, an employee might be offered additional compensation, such as:
- Pension, sick leave or health insurance. Contractors normally set aside money from to cover these expenses themselves, or do without.
- Reimbursement for business expenses, such as travel and lodging. While it's not cut-and-dried, contractors are far less likely to receive reimbursements, so you need to figure in those costs when bidding on a job.
Taxes. If you’re an employee, employers have to withhold taxes from your paycheck, as well as pay a portion of your payroll taxes (including those to Social Security and/or Medicare) out of their own pocket.
Grievances and complaints. If an employer violates labor laws, an employee can file a complaint with that state's labor commission. A contractor, however, may have to sue his or her client in court.
How to challenge your status
Labor law is complex, so there's no hard-and-fast rule that determines your status. For instance, you can be a contractor without investing significant amounts of money because your business doesn't require it — freelance writers do that all the time. And you can be an employee and never receive company-paid training because, say, you were already trained before the company hired you.
If you and your client/employer have a written contract, it might clarify the relationship, according to the Internal Revenue Service. But even without a written contract, you can challenge your status if you have good reasons to believe you’re an employee (or contractor), according to the Employment Law Center.
If you or the company that you work for needs guidance, you can fill out an IRS worksheet called Form SS-8. The agency will then determine, for tax purposes, whether you are a contractor or an employee.