5 Key Differences Between Employees and Independent Contractors

If you own a business, there are a couple of ways you can go about fulfilling your company’s staffing needs. With a few notable exceptions, you are generally going to be choosing between hiring employees (either full-time or part-time) or contractors.

Your decision to hire an employee or an independent contractor will depend on your company’s needs and most likely your financial capabilities. It is important to keep in mind, however, that just because you call a worker an independent contractor doesn’t mean they don’t fulfill the legal criteria to be considered, and treated, as an employee.

Misclassifying a worker as an independent contractor when they meet the legal definition of an employee is a common misstep that could lead to serious trouble for your business, including paying back pay for Fair Labor Standards Act (FLSA) requirements like overtime and minimum wage, paying back taxes for things like social security that should have been withheld as well as penalties for not withholding those taxes, and providing employee benefits.

Still, there are plenty of benefits to properly utilizing independent contractors for certain situations, so in this blog we will outline five of the key differences between the two to make sure you are informed and to help you more effectively leverage your workforce.

1) Benefits

Your employees are likely entitled to some sort of benefits for working for your company. These could include health insurance, retirement plans, and much more. Plans such as these are generally a major selling point to help you recruit and retain top-level talent, but they are also expensive. However, you do not have to provide such benefits to independent contractors.

2) Taxes

To put it simply, you are responsible for withholding employee taxes, while independent contractors are responsible for their own taxes. These tax withholdings are required under the Federal Insurance Contributions Act (FICA), but independent contractors are not subject to FICA.

3) Liability

As the employer, you are subject to a number of liabilities when you hire part-time or full-time employees. If they are injured on the job, you may owe them worker’s compensation. They are also protected by workplace safety laws and anti-discrimination laws. Independent contractors do not incur any such protections.

4) Costs

Employees are entitled to at least the federal minimum wage ($7.25/hr), and the state minimum wage of ($9.00/hr) in California. Most employees are also entitled to overtime pay (time and a half for each hour worked over 40 hours in a week). You will have to pay the independent contractor only the fee you agree upon in your contract for the services provided, even if it is below minimum wage for over 40 hours of work. You will only have to pay the contractor for a finite period of time (either a flat fee for a service or hourly for the duration of the work), whereas you will continue to pay an employee a wage so long as they are employed.

5) Termination flexibility

While California is an “at-will” employment state, meaning employers can terminate employment at-will without cause, there can be much more red tape and risk in terminating an employee than there is with ending a relationship with an independent contractor. California has some of the strictest employment laws in the country, which means you may still run the risk of a lawsuit for wrongful termination, whereas an independent contractor you can hire at will and end the relationship as you please.

Please keep in mind that this is not an all-inclusive list of the differences between independent contractors and employees. If you are considering whether to hire an employee or a contractor, there is a great deal at stake and at risk, and it is always worth it for you to consult with a skilled business attorney like those at Integrated General Counsel before making any decisions. We can help you avoid misclassifying your employees and protect you from severe risks and penalties. Give us a call today.

Integrated General Counsel