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Independent contractor or employee? Know the difference.

Contractor positions are becoming increasingly frequent in the "gig" workplace. Hiring independent contractors instead of employees offers significant benefits to a company, including saving money on employment taxes, employee benefits, and workers' compensation insurance coverage.

A company may have contractors and employees working alongside each other. Sometimes the distinction between the two job classifications may not be obvious. And sometimes, an employer's classification of a worker may be wrong.

A worker's classification as an employee or contractor is based on more than their job title or how their position is labeled in the contractor agreement. There are certain baseline indicators that can be used to test a worker's classification:

  • Autonomy: Does the worker have the flexibility to work from an off-site location and on a schedule of their choosing? Do they dictate the best method of achieving their project's goals? When the worker can dictate such terms themselves, it is often a sign they are an independent contractor. When a company supervisor is in charge of deciding such terms, it is indicative of an employee relationship.
  • Payment: Does the worker get paid incrementally every one or two weeks? Or are they paid a flat rate? Employees are usually salaried or receive an hourly wage -- and taxes are withheld from their paychecks. Independent contractors usually receive a lump sum for a project.
  • Timeline: How long is the working engagement? Independent contractors typically enter into short-term working contracts with an employer, while employees are hired for the long term.
  • Skills: Does the worker bring a specialized skill set to the table? Typically, independent contractors are hired for their unique area of expertise or ability to perform a task that an employee in the company otherwise could not. Employees, on the other hand, are more likely to undergo on-the-job training.
  • Equipment: Who provides the materials needed to carry out the job? If the worker is an employee, the employer is responsible for supplying whatever equipment is required for the job. However, independent contractors take on this responsibility themselves.

If an employee is misclassified as an independent contractor, they may lose out on healthcare, paid time off, and overtime pay -- among other valuable benefits. Understanding the distinction between these two job classifications is important in determining whether you have legal recourse to go after lost compensation.

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