As a business grows, so do the tasks and responsibilities necessary to sustain it. It may not be possible for a sole business owner to handle everything on his or her own. He or she must soon delegate certain tasks and responsibilities to someone else by hiring an employee or an independent contractor. Like many important relationships, choosing an employee or independent contractor carries with it financial and legal consequences which the business owner should evaluate before entering into the relationship.
Employee v. Independent Contractor: What is the difference?
Generally, an employee is someone who works for wages or a salary under the supervision of an employer who provides the training, benefits, and tools for the employee. An independent contractor performs a specified project for a specified price for a client or customer using his or her own training and tools, without the supervision of the client or customer and generally does not receive additional benefits.
Sometimes, the distinction is not clear. To help provide clarity, the courts and government agencies, like the IRS, focus on the level of control over the employee and the relationship between the parties. For example, if the business owner exhibits significant behavior and financial control over the person providing the services, the person providing the services will likely be considered an employee for tax and other legal purposes.
Control Over The Work
Behavior control involves directing and controlling the work. This includes providing instructions and supervision over how, when, and where to do the work. The more direction and control the business owner has over these factors the more likely the worker is an employee, not an independent contractor.
Financial control involves the business aspect of the work, not just the mechanics of how the work is performed. An independent contractor has more of a significant investment in the work, is usually responsible for his or her own expenses, and realizes a profit or loss from the work, instead of receiving a salary or hourly wage.
Consider the checker at the local grocery store versus the handyman hired to fix a kitchen cabinet door. The handyman likely bought the tools to do the job, paid for the ad in the local newspaper or the internet, will realize the profit or loss from the job, and will have to remit the taxes on the amount received. The checker, on the other hand, likely did not invest in the equipment or training used to do the job and will receive a wage after the employer deducts the taxes. The amount of revenue the grocery store generated during the pay period will not impact the amount the checker receives.
Relationship Between the Parties
How the parties view their relationship is another factor to determine what kind of relationship exists. For example, does the worker view the recipient of the services as an employer or a client? Does the business provide benefits to the worker, such as paid leave and health insurance? A written contact may help clarify the parties’ understanding of the relationship but may not be dispositive if the other factors described above portray a different kind of relationship.
Why does it matter?
The distinction between an employee and an independent contractor carries important legal and financial responsibilities for the parties. For example, an employer is responsible for paying payroll taxes, workers’ compensation insurance, must pay the worker overtime if the worker works more than a certain amount, and may be responsible for providing certain benefits.
An independent contractor obtains his or her own insurance and is responsible for remitting his or her taxes, instead of having them deducted from the payment received from the recipient of the services. An independent contractor also does not get paid more if he or she ends up working more to complete the task unless the parties have agreed to it.
Which should you choose?
The answer to this question depends on the size of your business and the type of services you need. You may want to hire an employee if the person will be part of the ongoing operations of the business, the work is indispensable to the business, and your business is large enough to shoulder the regulatory and tax burdens associated with an employment relationship. On the other hand, it is better to hire an independent contractor if you only need periodic help with a project involving a specialized skill.
To illustrate this, let’s take a look at Tim, a former mechanical engineer who opened a florist shop called Dogwood Bloom, LLC in Asheville, North Carolina. During the first few months of the business, Tim handled everything himself – selecting the flowers, creating the arrangements, and handling the sales. However, now that business is growing, he needs help running the store and making deliveries. In this scenario, Tim would probably hire an employee because the skillset, (creating the arrangements, cleaning the store, making deliveries, and processing sales), will be part of the ongoing business operations. Tim will train the worker, supervise him or her, provide the equipment for the job, and pay the person a wage. The person will also have a set schedule at the florist shop.
Now that Tim has hired an employee, he has time to strategize on how to grow the business. He realizes his weekly ad in the newspaper and word-of-mouth are not sufficient to attract new customers. He decides to hire a digital marketer to create exposure on the internet through social media and search engine optimization. Tim pays the digital marketer a set rate to generate ten social media posts a week and an additional fee to revamp Tim’s website. Tim does not provide the equipment for the digital marketer or any training or supervision. The digital marketer simply delivers the agreed-upon content at an agreed-upon date. In this scenario, the digital marketer would be an independent contractor.
Consult An Experienced Business Law Attorney
The line between an employee and an independent contractor can be blurry sometimes. One of our experienced employment law attorneys at Wilson Ratledge can bring clarity and assist you with structuring the relationship in a legal way to help foster the long-term success and growth of your business. Call us today at 919-787-7711 or fill out our online contact form to schedule a consultation!