Employees vs. Independent Contractors: What's The Difference?

Understanding the Difference Between Employees and Independent Contractors

The owners and managers of small businesses oftentimes find themselves not fully understanding the legal distinction between an employee and an independent contractor. With surprising frequency, a small business discovers that what it thought was an independent contractor relation actually legally is an employer-employee one.

Factors to Determine an Independent Contractor

A key consideration in ascertaining if a person is an independent contractor centers on the time, place and manner in which work or services are performed. An independent contractor usually is able to perform their work or supply services at his or her own schedule. Services are performed in a location selected by the independent contractor. In addition, he or she has tremendous leeway in the manner in which the services are provided. The more restrictions placed on a person said to be an independent contractor, the more likely that individual actually will be deemed legally to be an employee.

An independent contractor typically is involved in a business, occupation, trade or profession that is distinct from the business for which he or she is providing services. The skillset of an independent contractor usually is quite specialized. An independent contractor typically provides his or her own equipment or tools in performing services. Oftentimes, but not always, an independent contractor is paid by project.

Factors to Determine an Employee

The key factor associated with an employee is the fact that the business provides explicit directions and retains control over the manner in which work is undertaken and completed. In addition, the business usually provides the tools and equipment that is used by the individual providing services or completing tasks on behalf of the enterprise.

An employee undertakes work at a site designated and approved by the business. The business sets a work schedule for an employee. An employee is paid on a recurring base based on time. This includes wages paid hourly or salary paid for a specific timeframe.

The tax and other consequences associated with this type of error can be profound. Therefore, small business owners and managers must understand the basic legal distinctions between independent contractors and employees.

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