Yes, it matters a lot whether you are classified as an independent contractor or employee, especially in areas like pay, taxes, benefits, unemployment compensation, workplace injuries, and more. An independent contractor is legally any worker who is not classified as an employee.
Many rules that employees are subject to do not apply to independent contractors. It can often be hard to tell whether a certain worker is an employee or an independent contractor. A worker’s status can often end up being resolved in a court. Over time, the IRS, case law, statutes, regulations and common law have developed some tests that can be used to determine if a worker is an employee or an independent contractor. Some of those tests include:
– Who supplies the materials, equipment and tools for the job. If the worker supplies those, he or she is probably an independent contractor.
– Who sets the work schedule. If the worker sets the schedule, he or she is probably an independent contractor. Employees typically are told a set schedule in which to work.
– How the worker is paid. If the worker receives a steady paycheck, he or she is more likely to be an employee, versus an independent contractor who receives pay for hours worked or jobs completed on an irregular schedule.
– Whether the worker can choose whether or not to come to work without fear of being fired. If he or she can decide, he or she is more likely to be an independent contractor.
– Who controls the way the work is performed. If the worker does, he or she is probably an independent contractor. If the company does, the worker is more likely an employee.
– Whether the job is permanent or temporary. If it’s temporary, the worker is probably an independent contractor.
Although you may think it’s not a big deal how a worker is classified, it makes a big difference for several reasons, primarily taxes. Employees as well as employers are taxed differently depending on whether their workers are independent contractors or employees. If they are independent contractors, the workers are in charge of their own taxes, including their own social security taxes. However, employers must pay a share of their workers’ social security taxes, as well as unemployment taxes and workers’ comp taxes. Therefore, it’s usually cheaper for employers to hire independent contractors rather than employees.
Also, employees usually get extra benefits that independent contractors don’t get, such as unemployment (if the worker is laid off), paid vacation time and sick time, and health insurance. Independent contractors also don’t get overtime pay for any long hours they work, whereas employees do. It’s usually better for a worker for him or her to be classified as an employee rather than an independent contractor. However, it’s usually better for the employer to classify workers as independent contractors, which sometimes happens even if they aren’t.
If you believe that you are being classified as an independent contractor incorrectly, call Oakland-San Francisco employment attorney Micha Star Liberty of Liberty Law. She believes that all employees should be classified correctly so they receive all of the benefits to which they are entitled. Call her today at 510-645-1000 or 415-896-1000.