Employee Vs. Independent Contractor

The distinction between an Independent Contractor and an Employee hinges on several factors. If you have an Employer-Employee relationship, it makes no difference how it is labeled. The substance of the relationship, not the label, governs the worker’s status. It does not matter whether the individual is employed full time or part time.

To determine whether an individual is an Employee or an Independent Contractor, the relationship of the worker and the business must be examined. In any Employee/Independent Contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.

These factors primarily fall into three categories: Behavioral Control, Financial Control, and the Nature and Duration of the Relationship. Here are some key differences to help you make the distinction between an Employee and an Independent Contractor:

Behavioral Control

Independent Contractor:

Control: The individual has significant control over how, when, and where the work is performed.

Independence: Operates their own business and provides services to other clients or companies.

Tools and Equipment: Typically provides their own tools and equipment necessary to complete the job.

Instructions: Receives little to no detailed instructions about how to carry out tasks, focusing on the outcome instead.

Employee:

Control: The employer has significant control over how, when, and where the work is performed.

Independence: Works solely for the employer (or primarily for one employer) and follows the employer’s instructions and policies.

Tools and Equipment: Usually uses the employer’s tools, equipment, and materials.

Instructions: Receives detailed instructions and training on how to perform tasks and duties.

Financial Control

Independent Contractor:

Payment: Typically paid per project, per job, or on a commission basis, rather than a regular salary.

Expenses: Often responsible for their own business expenses, including travel, equipment, and supplies.

Profit and Loss: Can realize a profit or suffer a loss based on how efficiently they
manage their business.
Employee:

Payment: Receives a regular wage or salary.

Expenses: The employer covers work-related expenses.

Profit and Loss: Does not typically face the risk of business losses; earnings are consistent regardless of the company’s performance.

Relationship Nature and Duration

Independent Contractor:

Term: Often engaged for a specific project or a fixed term, with the relationship ending upon project completion.

Permanence: The relationship is generally temporary and project-based.

Employee:

Term: Usually has an open-ended relationship with the employer, with no set end date.

Permanence: The relationship is typically ongoing and permanent, subject to termination policies.

According to IRS guidelines, although a contract may state whether the worker is an Employee or an Independent Contractor, this is not sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an Independent Contractor. It is how the parties work together that determines whether the worker is an Employee or an Independent Contractor. The insurance industry has always followed the IRS guidelines when distinguishing between an Employee and an Independent Contractor.

It is important to understand that Employers are responsible for an Employee’s actions and injuries. Different states have different laws when it comes to requiring an Employer to carry Worker’s Compensation Insurance, and even if you are exempt from carrying Worker’s Compensation under your state’s law, that does not void your liability should an Employee suffer an injury while working for you. You can call them whatever you want, but if an Employee suffers an injury while working for you, you can be held liable.