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:
- Even if you contractually label an intern as a contractor, how they’re classified by law still depends on how they’re required to work. Contractors can’t be forced to work set hours, and can’t reasonably do the same work as an employee.
- Whether part-time flexible workers like couriers and service people are classified as contractors or workers also depends on how they’re required to do their work.
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:
- Document filing/collection requirements (e.g. 1099 v. W-2)
- Federal tax withholding requirements
- Benefits, wage and time requirements
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.
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