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The Difference Between Contractors & Employees: A Two Minute Worker Classification Test

Several giants in the on-demand economy, including Instacart and Uber, are currently at the center of an ongoing debate around whether casual workers like crowdsourced couriers and chauffeurs are part-time employees or independent contractors.

The two worker classifications differ in important ways, and the question of whether to classify workers as obligation-free contractors or full-benefits employees isn’t one that’s limited to marketplace-style platforms—it also impacts small businesses and startups of every shape and size.

Are you hiring independent contractors or employees?

There are no hard rules about what makes someone a contractor or an employee. The IRS has guidelines, but everything is on a case-by-case basis.

While employers can give workers whatever title they’d like (i.e. consultant, intern, manager), they’re still subject to federal and state laws around hours, wages and other compliance requirements. For example:

To determine employment status, the IRS generally looks at how much control an employer has over how the contractor does her work. To know whether your worker is actually an employee and not a contractor, take a look at whether she falls under any of the contractor categories.

Independent Contractors vs. Employees

Contractors Employees
Paid by the job or project Paid by salary, or by the hour
Can control how work is done, even if employers control the end result Receive training from an employer and can be required to do work how employers prefer
Work for more than one company at a time Often work for one company
Provide own benefits Receive employee benefits
Invest in own equipment and facilities rather than using the employer’s Receive equipment and tools to do work, at a set site or office
Perform project-based work Perform work that’s critical to the company’s day-to-day operations
Can work own set hours Can be required to work employer-set hours
Cannot be required to wear uniforms Can be required to wear uniforms

Source: IRS.gov

Why does employee classification matter?

Employees are subject to specific compliance requirements. Whether you classify a worker as an employee or independent contractor will impact:

Improperly classifying workers as independent contractors when they’re really employees can open businesses small and large up to significant and sometimes company-bankrupting legal fines and penalties.

How can I be sure I’m safely classifying workers?

Our guidelines are meant to serve as a quick gut check, but classifying workers is serious business. In order to be certain that you’re classifying workers correctly, we strongly recommend seeking legal counsel. Proper classification starts long before hiring, right when you’re setting the terms of employment and drafting job descriptions.

Once you’ve safely classified workers, it’s critical to follow proper payroll and recordkeeping protocol. Zenefits helps you process payments for both contractors and employees while maintaining the proper paperwork, like forms W-2 and 1099, that’ll keep you compliant.

Schedule a demo today to see how we can help you stay compliant while growing your workforce.

The post The Difference Between Contractors & Employees: A Two Minute Worker Classification Test appeared first on Zenefits Blog.