Independent contractor vs employee: what are the differences?
In the world today, as a result of the company’s need for certain things like speed, expertise, skills, managed funds, etc to execute a particular task or project, they tend to look beyond their workforce and employee. In situations like this, they tend to leverage the use of independent contractors (ICs) by employing contractors. This is sometimes the best available option that will avail the company with quality output within a short time and with a limited cost of service, unlike the company’s real-time workers. Thus, there exists a wide range of difference between employee and independent contractor. This is as a result of their difference in the extent and specificity of their work, the working duration, tax and payment system, loyalty, expertise, level of responsibility and control, etc.
Over the years, a lot of companies, small to big, have been in a difficult position to distinguish between an employee vs independent contractor. This error has led to the wrong classification of the workforce in an organization. Not only has it led to the misclassification of workers, but it has also led to heavy penalties and charges on the company. The misclassification of Uber drivers by Uber come years ago is a perfect example. In this article, we will be clarifying your doubts on independent contractor vs employee, the associated risks of their misclassification, the definition of a private contractor or subcontractors, etc. Hold tight as we carefully take you through this journey.
The meaning of “Independent Contractor” vs “Employee”
Just before we proceed, we need to define the meaning of what is an independent contractor, and we also need to give the perfect and well-fitted definition of what is an employee too.
An employee or a staff is a talented, expert, professional, or skilled individual that works full-time for an organization. An employee is also used to refer to an individual that works completely for a company, the company has full control over his activities, responsibilities, duties, work, loyalty, working hours, guiding policies, etc. The company gets to manage their taxation, salary disbursement, provide bonuses, compensations, etc. They are considered W-2 staffs. Loyalty of these ones lies within their organization. They are responsible and responsive to the organization when called upon.
An independent contractor (IC) is a term used in describing a skilled person that independently carries out his daily activities. Thus, they bear some of the guiding principles in a self employed definition. They are skilled and experts in their various fields and do not owe their loyalty to any client or company. Thus, they can independently work with a lot of organizations and clients at the same time. They are responsible to pay certain taxes to the authorities themselves. They are also required to provide all tools and equipment needed for the completion of a particular project. Another distinguishing factor in self employed vs employee is that contractors can work at their own pace, space, and convenient time.
Importance of classifying workers
The correct classification of your workforce is a very important thing you and your organization must be careful of. Incorrect classification of workers is a very dangerous and risky situation that will not only bring a burden to your organization but might lead to the closure of your business. Thus, labelling workforce correctly is essential and compulsory.
The great variation between employees and contractors ranging from how they are paid, where they work, the way they are paid, individual taxation, etc, are all important deciding factors in classifying your staff. It is also important that you manage your workforce very well, have everything sorted out in a written and legal agreement before hiring and ensure that you follow every bit of agreement and classification while the work is going on. A need arises for the classification of workers based on important policies put in place to effectively hire and manage staffs. Regulations that apply for the different classes of workers exist and this is meant to be duly followed for the effective running of the work functions of the company. Misclassification will put you and your company in several risks and tight corners like facing auditing, penalties and fines, heavy legal lawsuits, distorted growth, work downtime, loss of customers and clients, damage to the company’s image and reputation, etc.
Main Differences between Employees and Independent Contractors
While discussing the concept of a contractor vs employee, highlighting the specific difference between these two categories is paramount. Based on their pattern of work, taxing, payment system, responsibilities, etc, these classes of workers can be differentiated under the following headings:
Experience and expertise
Independent contractors or self-employed workers are notably known for their outstanding level of specialization, wide range of experience and training, the bulk of previous projects and activities, etc in their field of specialization. Most times, an individual can only become a contractor when he/she has received standardized certifications, engaged in special education and training which is always necessary for them to gain more experience in their area of specialization. The responsibility of providing individual contractors with training does not lie on the shoulder of the employer. Although employees tend to receive some sort of training and developmental courses from their boss, they can’t still be compared to self-employed individuals who go the extra mile to become a better person who is so skilled in their area of specialization and can handle highly specialized jobs and projects.
Control of workers
In an employee contract, companies clearly states that staff’s loyalty, total management are in their hands. They oversee and monitor staffs activities. Companies dictate style and duration of operation, the do’s&dont’s, sanctioning, dismissal, etc. ICs or freelancers are only attached to the organization due to their employment/engagement contract. Companies do not in any way boss over or question the project’s methodology or timing.
Fulfillment of assigned tasks
Fulfilling an assigned task is a responsibility executed by ICs because of the agreement that exists between them and their companies. Scope of work is a very important document that serves as a source for the right foundation of a healthy relationship and also listing out what is expected of staff and company. This document assists in highlighting the requirements of what is meant to be executed, the time that it would take to complete these tasks. In cases where there are needs for changes and modifications and going about payment terms of private contractors, it is also clearly stated in this scope.
The pay period of the employee remains the same unless it changes due to some reasons. The pay period does usually varies from a week to a month. The basis of payment for private contractors arises from the completion of milestones and tasks by these self-employed experts. It all boils down to the contractual agreement that is laid down and agreed upon by both parties involved. The employers get to pay the self-employed contractors based on the invoices they receive from these private contractors.
The billing rate is another major difference that differentiates the employee from the private contractors. The billing rate of private contractors varies from different areas of work as there are different services offered by ICs and each of these responsibilities/projects gets billed differently. Employees on the other hand are billed with the same rate for each of the activities they execute. The only time the billing rate might increase is when an employee gets promoted or the employee gets some compensation and benefits.
This is another important influencer which distinguishes staffs from ICs. The full-time company staff is completely bounded with assigned, strict, and stipulated work hours of the organization. The staff only works during the company’s working hours and they only work outside these times only when there is overtime or important deadlines. Self employed are however not bounded by the company’s work timeframe. They get to work at the pace, speed, and a time that is convenient for them. Thus, how long and what time they work depends on them.
A proper payroll management is another defining factor when employing staffs in an organization. Taxation by staffs are deducted from their salary, and they are withheld and remitted to the relevant authorities by the employer. W2 is the form utilized in documenting, recording, and reporting the employee’s payroll and salary system. ICs, however, do theirs independently using W9 form.
Mitigating misclassification risk
As companies expand globally, an upsurge need for specialized talents who can carry out tasks at a certain level of expertise is required. However, the cost and process of employing and overseeing the employees’ welfare have become a big burden to many companies. Thus, companies are now switching to engaging the activities of ICs carrying out tasks and projects at affordable cost and reduced time of operation. The burden of maintaining compliance on these contractors reduces, but the risk attached to this decision is very severe. But then, companies find it hard to differentiate between their workforce and the hired contractors. This is an uphill organization’s struggle as a result of many reasons as mentioned above. Since worker misclassification is viewed differently by organizations in different countries, their compliance and workers’ management will also vary.
To mitigate these problems, companies can engage any of the following solutions:
Global PEO or Employer of Record
A global PEO or an employer of record like WeHireGlobally is an external organization that works with another organization in mitigating compliance and misclassification risks, ensure the safe management and fulfillment of employees’ compensations, payroll taxes, etc.
Efficiently strategized Policies
Developing an efficient company policy that will cover the proper management and engagement of either an IC or a staff is another method of mitigating incorrect classification. It should also indicate the treatment style and method the self employed contractor will experience. Furthermore, the policy must have legal backing to reduce the associated risks.
A legal adviser for Safe contract agreement
Companies should embrace consultation with legal advisers while making plans of engaging contractors. Legal advisers direct them to act according to guiding legal obligations, interpret the penalties and remedies, and ensure the safest contractor’s terms of services.
FAQ Independent contractor vs employee: what are the differences?
A staff will be regarded as an IC has his/her work cannot be supervised/monitored by the employer company, projects are executed with high specialization, he/she have several organizations or clients that can work with at the same time. Employees are then considered as an employed and hired professional by an organization and all his/her duties and loyalty are controlled by the organization.
Taxing of your staff depends on the nation of operation and the various milestones and deliverables that must be met by the staff. A self-employed working with many clients will have the tendency of higher taxation versus a professional who is attached to just the employer’s company.
This depends on certain factors that range from taxes, working duration, degree of control, etc.
Yes, an IC might experience wrong classification as a company’s staff and vice versa.