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Why does it matter if I’m an independent contractor or employee?

On Behalf of | Aug 25, 2022 | Employment Law |

Independent contractors enter into agreements to perform certain services in exchange for payment. This is different from the type of work that involves an employment contract. Employment contracts are one way to establish an employer-employee relationship. Contracts with independent contractors do not establish this relationship. What is the difference between independent contractors and employees, and why does it matter?

Independent contractors vs. employees

Employees are entitled to overtime pay, benefits such as sick leave and medical insurance, are eligible for workers’ compensation benefits, unemployment benefits and are protected by laws such as the Family Medical Leave Act (FMLA) and the Fair Labor Standards Act (FLSA). Independent contractors do not enjoy these benefits.

Independent contractors do have leeway on how to perform their job duties and what projects they agree to work on. Independent contractors can negotiate their terms of service, which includes their pay rate. However, independent contractors do not enjoy the full benefits of an employee.

What makes you an independent contractor?

There is no one statutory test to determine whether a worker is an employee or an independent contractor.  The distinction depends on the extent to which the worker’s efforts are an integral part of the employer’s operations. It also depends on the permanency of the contract. Whether the worker is using their own facilities and tools is another factor as is the amount of control the employer has over the work performed.

Where the work is executed, whether a formal contract is executed and whether the worker is licensed does not affect whether an employer-employee relationship exists. The timing or mode of compensation also does not affect whether an employer-employee relationship exists.

The distinction between an independent contractor and an employee is significant. Employees are protected by certain laws and enjoy certain benefits that independent contractors do not. Independent contractors have more freedom and flexibility to choose their own working conditions. Knowing the difference between independent contractors and employees is key to ensuring that any wage and hour laws are not being violated.