Employee vs. Independent Contractor
by Leigh A. Zaykoski
Incorrectly classifying an employee as an independent contractor can have serious financial and legal ramifications for offending companies. So how do you know how an employee should be classified? There are various classification methods available, but one of the most accurate and frequently used methods is the Internal Revenue Service 20-factor analysis. This analysis lists twenty factors that distinguish an employee from an independent contractor. The following is a summary of each distinction.
1. Work Instructions
Employees of a firm must comply with instructions on how their work is performed, the hours that they must work, and what location is used for work. Independent contractors are able to set their own work hours and use the methods they prefer to complete the contracted work, as long as an acceptable and agreed upon result is reached.
2. Training
An employee is trained in the methods and procedures the company uses to accomplish a job or task. Employees must use these methods to perform their work. In contrast, independent contractors receive no training from the hiring organization and are able to select their own work methods.
3. Integration of Services
An employee's work and continued good performance are integrated into the business. The organization depends upon the successful completion of an employee's work and management coordinates the efforts of employees. The work performed by contractors does not have a bearing on the longevity or success of the hiring organization.
4. Performing Services Personally
An employee must perform the tasks they are assigned. These tasks cannot be delegated to someone else. Independent contractors are able to assign their own employees to complete tasks.
5. Supervision/Hiring/Compensation
Employees of an organization act as representatives of the employer when making hiring, supervision, and compensation decisions. Contractors hire, supervise, and pay workers on their own terms and are responsible for any issues arising from the use of these subcontractors.
6. Continuity of Relationship
An employee works for the same organization until he/she decides to leave. A contractor is hired to do one job and has no continuous relationship with the organization.
7. Work Hours
Employees must work during hours set by the organization. Independent contractors may set their own work hours.
8. Required Full Time Work
Employees usually work full time for an organization. Independent contractors may work for more than one organization during the hours that they choose.
9. Working on an Employer's Premises
Employees must work on the premises of an employer, while independent contractors work on their own premises and use their own equipment and supplies. In the case of on-site independent contractors (i.e. construction), the contractor is responsible for using his own tools and equipment.
10. Order or Sequence of Work
Employers direct employees on the order of their work. Independent contractors may perform services at their desired pace.
11. Oral and Written Reporting
Employees are often required to submit regular reports to superiors. Independent contractors are not required to submit such reports.
12. Payment
Employees are paid at set intervals, such as monthly or bi-weekly. Independent contractors are paid only their straight rate.
13. Business/Travel Expense Payment
Employees are reimbursed for business and travel expenses, while an independent contractor absorbs these expenses s a cost of doing business.
14. Tools & Materials
Employees are given tools and materials while independent contractors must provide their own.
15. Investment
Employees have no significant investment in the employer's facilities, while independent contractors have a significant investment.
16. Profit & Loss
Employees do not realize a profit or loss based on their good or bad decisions. Contractors can realize a profit or suffer a loss based on their business decisions.
17. Working for Multiple Organizations
An employee usually works for only one organization at a time, while an independent contractor may work for whomever her or she chooses.
18. Public Services
An employee does not make his or her services available to the public. Independent contractors may have a business license or employees and do make their services available to the general public.
19. Termination
An employee may be fired at any time. Contractors cannot be fired, provided their work meets the specifications of the contract in place.
20. Right to Quit
Employees may quit at any time without any adverse impact. Contractors must fulfill the terms of their contract.
By applying the above factors to each individual situation, organizations will be better equipped to classify individuals as employees or contractors. While this can be a time-consuming process, it is well worth it if fines and legal action can be avoided.
About the Author
Leigh A. Zaykoski is the President and CEO of A Wealth of Words, Inc. A Wealth of Words is a corporation dedicated to providing high quality web content and business writing services to companies in all industries. Working with Leigh and her company can help you to more effectively market your business and boost your profits. If you're interested in jumpstarting your online marketing efforts, contact Leigh at ceo@premiumwriter.com for a free consultation.