Coke vs. Pepsi. SEC vs. the Big Ten. Who vs. Whom. Choices can be tough, but if you have the facts, you can make the right call. Let’s talk independent operator vs. employee: which one do you employ?
When starting a new business, it’s common to have your first several employees be independent operators or contractors, but there may come a time when you decide to hire employees and/or convert the independent operators to employees, depending on the longevity and scope of their work.
What’s the difference?
An Independent Contractor:
Could have more than one client
Has own tools and sets own hours
Can generally be let go by the employer at any time for any reason, unless the consulting contract is for a specific amount of time
Not eligible for unemployment compensation or workers’ compensation benefits
Paid according to terms of contract
Not entitled to join a union
An Employee:
Performs duties dictated or controlled by others
Is given training for work to be done
Will likely be eligible to receive unemployment compensation after layoff or termination
Unless employment is "at will,” can be terminated by the employer only for good cause and with notice
Is covered by federal and state wage and hour laws such as minimum wage and overtime rules
May be entitled to join or form a union
Works the hours that are set by the employer
What is the bottom line?
The fundamental consideration is right of control. Does the employer have the right to exercise control over the worker? Can the employer hire and fire the worker, set his or her hours, and determine the worker’s responsibilities? If the employer has the right to dictate both the means and the manner in which the worker performs the job, then the relationship is that of an employer and an employee. However, if the employer can control only the final results of the work, then the parties have an employer-independent contractor relationship.
Why does this matter?
If you have independent operators working for you, make sure that their role fits the legal definition. If your independent operators are legally employees, you may have to make these changes to be in compliance.
Reimburse them for wages you should have paid them under the Fair Labor Standards Act, including overtime and minimum wage.
Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare, and unemployment.
Pay any misclassified employees workers' compensation benefits.
Provide employee benefits, including health insurance and retirement.
Still not sure? We can help. Contact our Director of Human Resources, Christina Davis, at christina@lmc.group for expert counsel.