Free Enterprise - The FindLaw Small Business Law Blog

When Is a Contractor Not a Contractor?

When is a contractor not a contractor? According to the law, it's when the worker is actually an employee. With the advent of the gig economy, (Uber, Door Dash) this issue is more prevalent than ever. This trend doesn't just apply to small or fledgling companies. In fact, this year, for the first time in its 20 year history, Google employed more contractors than employees.

So is your new worker a contractor or an employee? The answer is complicated and may be surprising.

Is My Worker a Contractor or an Employee?

Employers may be quick to jump on the contractor bandwagon, but beware. Just because you hire someone as a contractor doesn't mean the law, or the IRS, will see them as one. And mislabeling may come with some expensive consequences. The label will be determined by common law principles, the Fair Labor Standards Act, and court decisions. Factors reviewed include:

  • Nature of the work performed
  • Level of control over the worker's service or product
  • Method of compensation
  • Who supplies tools/materials
  • Manner of discharge, and
  • Transient nature of the work itself

Why Does It Even Matter?

Companies are increasingly hiring contractors, as opposed to employees, for a variety of reasons. They may need specialized expertise for only a short period of time. Or the company may want to save money, since companies do not need to provide contractors with the same benefits given to employees, such as health insurance and stock options or the right to buy Employee Stock Purchase Plan (ESPP) shares.

In addition to expensive benefits, an employee is also a taxable event. Meaning, an employer's tax liability is determined by the worker's employment status. If a worker is an employee, the employer must pay federal and state unemployment taxes, social security tax and workers compensation/disability premiums into a state insurance fund. On the other hand, when a worker is an independent contractor, the worker has to pay most, if not all of these payments, and the worker must file taxes quarterly.

If an employer erroneously defines a worker's status, the IRS will force the company to pay for past taxes in all of these categories. Employee status is a complicated, and potentially expensive, proposition. If you are unsure of your company's situation, contact a local employment lawyer, who can help review your situation and offer you much needed legal advise.

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