Being an Independent Contractor vs. Employee
By Lisa Burden, J.D. | Legally reviewed by Melissa Bender, Esq. | Last reviewed March 25, 2024
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You might not have considered the difference between being an employee and an independent contractor. In many respects, there seems to be no difference at all. Often, freelancers and employees work side by side at the same company, even doing the same or similar work. However, there are important legal differences between an independent contractor and an employee.
Your job status affects many issues. These include benefits, taxes, and liability. If you're accepting a job offer to be an independent contractor, you should know some of the key differences.
Differences Between Independent Contractors vs. Employees
The below chart lists what you should be aware of when comparing independent contractors and employees.
| EMPLOYEE | INDEPENDENT CONTRACTOR |
|---|---|
| Usually works for only one employer | In general, provides services to more than one company |
| Works the hours set by the employer | Sets their hours |
| Often works at the employer's place of business | Works out of their own office or home |
| Often receives employment benefits, such as health and disability insurance | Does not receive employee benefits such as health insurance, workers' compensation, or unemployment insurance |
| Employer exercises a significant degree of control over the employee | Works independently |
| Accomplishes tasks in the manner the employer has requested | Has the authority to decide how to go about accomplishing tasks and does so without the employer's input |
| Tends not to incur costs or make investments in the work | Uses own tools to perform tasks |
| Has a general education and experience background and receives special training from the employer to do the job better | Has acquired very specialized skills and comes to the work relationship with a particularized education and experience background |
| Receives net salary after the employer has withheld payroll taxes, including state and federal taxes, Social Security tax, and Medicare tax under the Federal Insurance Contributions Act (FICA) | Not subject to income tax withholding. Payroll taxes are not withheld from the paycheck. Must calculate and pay own taxes. As a result, freelancers must pay estimated taxes every quarter |
| Will be eligible to receive unemployment compensation after layoff or termination in most instances | Not eligible for unemployment compensation benefits |
| Will receive worker's compensation benefits for any workplace injury | Not eligible for worker's compensation benefits |
| Can be terminated by the employer only for good cause and with notice, unless employment is "at-will" | Can be let go by the employer for any reason, at any time unless the independent contractor agreement is for a specified term |
| Covered by the Fair Labor Standards Act (FLSA), a federal wage and hour law, as well as similar state laws | Paid according to the terms of the contract and does not receive additional compensation for overtime hours worked |
| Protected by workplace safety and employment anti-discrimination laws | Usually isn't protected by employment anti-discrimination and workplace safety laws |
| May be entitled to join or form a union | Not entitled to join or form a union |
Misclassification
Some employers classify workers as independent contractors to evade financial and legal obligations. Misclassification of workers is a common practice. However, it gets employers in trouble under state and federal law. The U.S. Department of Labor (DOL) ordered a medical staffing agency to pay $7.2 million in back wages and damages. DOL said the workers were misclassified as independent workers.
States have also addressed the issue of worker classification. In 2021, New Jersey made it illegal for employers to misclassify workers to avoid insurance expenses. The legislation also created additional enforcement options.
Saying that it's common to classify workers as consultants is not enough. Nor is providing a contract stating that workers are freelancers. These may not be enough to keep employers from legal and regulatory scrutiny.
Two companies that operated quarries violated the Fair Labor Standards Act when they classified delivery drivers as independent contractors, according to a 2021 lawsuit. The FLSA doesn't cover independent contractors. However, it protects employees in misclassification cases. The FLSA sets employees' minimum wages, work hours, and overtime benefits.
There are several tests for determining whether a worker is an independent contractor or an employee. The factors applied depend on the law, the court, or the agency. For example, the Internal Revenue Service (IRS) and the Labor Department each have separate criteria. They use them to decide whether someone is a freelancer.
Two tests — economic realities or common law control — or a combination of both are used. The standards consider how much control the employer exercises over the worker. If the employer controls the work, the worker is an employee. The delivery drivers said they were employees because their employers exercised significant control over their work.
A high level of control can undo an independent contractor agreement. The drivers said they signed an agreement noting they are independent contractors. Courts often find that workers are employees if the work relationship shows high levels of control. A written agreement stating otherwise can be overruled.
In one instance, an appeals court decided that the amount of control 7-Eleven exerted over its franchisees negated a written contract stating they were independent contractors.
Certain types of workers, such as drivers and delivery people, are often classified as gig workers. However, the Labor Department has rejected this rationale. It said that common industry practice is not an excuse to misclassify workers under the FLSA.
Legal Challenges
The standards for determining whether a worker is an employee or a consultant are still evolving. The Labor Department's new test for determining freelancer status under the FLSA went into effect in March 2024. DOL's rule introduces a “totality-of-the-circumstances" framework for analyzing independent contractor status. The six-factor test includes economic reality and nature and degree of control.
The new standard faces substantial legal headwinds as several groups have challenged the rule in court. As a result, legal experts say an injunction that would halt implementation of the new analysis is possible.
Get Help from an Attorney
Have you been misclassified as an independent contractor? It can be difficult to know whether you're an independent contractor or an employee. Legal options are available if you've been misclassified. Speak with an employment attorney if you need help with state laws, labor laws, or any other aspect of being an independent contractor.
Next Steps
Contact a qualified employment attorney to make sure your rights are protected.
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