Employees vs. Independent Contractors

Some startups and small businesses, in order to avoid the time and expense of the tax and regulatory issues concerning having employees, will hire independent contractors to work on the various projects the company may require. However, entrepreneurs and small business owners should be cognizant of the line between classifying someone as an employee, and classifying someone as an independent contractor.

There are often serious consequences for classifying a hired individual as an independent contractor when in reality their position is that of an employee, including, in Massachusetts for example, penalties for unpaid payroll taxes and payments to the worker’s compensation fund. In addition, considering a hired individual to be an independent contractor when in reality he or she is an employee can obscure the potential liability issues that the de facto employee poses to the business — for example, if the so-called independent contractor commits a tort in the scope of his or her work, if a court determines that the individual is in fact an employee, the court may hold the business liable. Finally, classifying an individual as an independent contractor may cut the business off from any intellectual property rights from the work done by the individual if separate agreements are not in place — in the absence of an agreement, businesses are generally only entitled to the IP rights to work performed by employees.

There are a number of factors that go into the employee/independent contractor analysis that are specific to the government agency or court trying to make the determination, but one of the major, universal tests, and the one predominantly used by the courts, is the test that looks at control over the work done by the employee/independent contractor. An independent contractor generally has control over the means and details of completing a project, while an employee is subject to the direction of the employer. Factors that indicate the relationship is one of an employer/employee include the employer demanding adherence to a strict work schedule (as opposed to simple deadlines), furnishing of equipment by the employer, and the employer directing particular details of a project. The determination is fact-specific, so if you are unsure whether you have hired an independent contractor or an employee, you should consult with an attorney, or with your state’s Attorney General’s office or Department of Labor.

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