Employee or Independent Contractor?

In this (brief) post, I won’t go into why you might want to designate someone an “independent contractor” as opposed to an “employee,” but rather what you have to do to make that designation stick. Often, businesses want to avoid generating an employer-employee relationship and would prefer to have an Independent Contractor perform certain tasks or jobs. Great. That’s totally ok. But what makes a person an Independent Contractor as opposed to an Employee?

Employees

Employees are regular workers for the employer. Employees perform work for the employer at the direction of the employer. The employee’s labor and activity benefit the employer and the employee is subject to the direct supervision of the employer as to the manner and results of the work to be performed. Hmmm… by that definition, my dad was my employer for a whole bunch of weekends working on his old car. But the idea here is that the employee is paid and is responsible to the employer as to the work and how it’s done.

Independent Contractors

Independent contractors, by contrast, have a defined scope of work to complete and are, generally, free to determine the means and manner of getting the work done.

Maybe an analogy would help:  Me helping my dad work on his car, where he’s telling me what wrench to use and where to put it when I’m done  (“For Pete’s sake! Wipe the grease off before you put it back in the tool box!) – that’s more like an employee. If my dad took the car to a mechanic and said “I need a new water pump installed.” And then he goes away and picks the car up a few days later – that’s more like an independent contractor.

In my analogy – with the mechanic, my dad doesn’t care what wrench the mechanic uses, how he treats his tools (or employees for that matter), or what it takes to get it done. They made an agreement for certain results or for certain things to be done.

Independent contractors run their own business and work for another person or business to complete an agreed-to scope of work. If you’ve got an “independent contractor” that’s not doing that, then you’ve really got an employee.

How Do I Ensure that They’re Really an Independent Contractor?

Generally, whether an person is an Independent Contractor or an Employee hinges on the degree of control exercised over them vs the independence of the work. Specifically, the IRS looks at factors it identifies as:

1. Behavior control – does the employer have a right to control the manner and method of the work?
2. Financial control – does the worker have the right to control the economic aspects of his or her job (tools, profit/loss, etc.)?
3. Type of relationship – how do the parties perceive their relationship?

It’s best to be sure that there isn’t any confusion in these factors or in the relationship at all. I advise clients that Independent Contractors should have:

• A written agreement for services
• A defined scope of work
• If the work is to be done a certain way, that should be spelled out in writing and should not be unreasonably detailed
• Defined milestones which are measurable
• Measurable results that are clear as to when the work is “complete”

And that, for Independent Contractors, the business should not

• Dictate how the work is done
• Let independent contractors supervise employees
• Allow the independent contractor to make decisions for the business
• “Over” supervise the work – be sure to let the independent contractor latitude to do the work as they see fit

Conclusion

Ok, so the post wasn’t so brief. But the point is that, if you’ve made the decision that you want an independent contractor rather than an employee, make sure you take the steps necessary to ensure that the classification is accurate and holds up to scrutiny.