Employee Differs From Contractor

What is the difference between an independent contractor and an employee? And why does it matter?

These are terms you hear tossed around to describe people who work for a company in one capacity or another, but they actually have precise legal definitions. Depending on which category applies may have a serious impact on your legal and financial obligations, as well as those of your employer.

An employee who is injured during the “course and scope” of his employment is limited to workers’ compensation benefits. In the same situation, an independent contractor can sue the company that hired him and receive an unlimited award, including punitive damages. On the other hand, an independent contractor cannot receive workers’ compensation benefits.

An employee who is terminated has the right to collect unemployment insurance; an independent contractor does not.

An employee has the right to be paid the minimum hourly wage; an independent contractor may be paid by commission.

An employer has to pay employment taxes and Social Security contributions for an employee, not for an independent contractor; but an independent contractor has to pay a self-employment tax.

As you can see, it can really matter whether a person is an independent contractor or an employee, and these are just some of the differences. The list goes on.

It is not always easy to know when someone is an employee or an independent contractor. It is not solely a matter of what you and your boss say or think you are. The IRS, for example, may have a different opinion.

There has been a lot of litigation in this area because the category into which a person falls can have such a significant financial impact. Depending on the situation--whether you’re trying to get paid the minimum wage or thinking of suing your employer for a work-related injury--you may present different arguments.

But here are some factors that the courts have said matter most in deciding whether a person is an employee or an independent contractor:

* Right of Control. When employers have the right to control details of accomplishing your job (not just results of the work) it usually means you are an employee. Outside commission sales people not subject to company control or direction are probably an independent contractors.

* Tools and Materials. An independent contractor usually supplies his own tools to do the job, such as a salesperson who works out of his home, using his own phone and supplies. An employee is given tools and materials by his employer.

* Distinct Occupation. Work that requires special skill or a business license is more likely to be done by an independent contractor, such as an attorney, an accountant, or an actor.

* Right to Discharge. An employee can be discharged unilaterally, in theory at least, while independent contractors usually have termination rights described by contract.

* Intent of the Parties. A less important factor is what you and your boss think you are, and say you are in a contract, if you have one.

This is a complicated area of law, so if you have a particular concern or dispute involving your employment status, you should consult an attorney.