Employee vs. Independent Contractor: What’s the Difference?

Misclassifying workers as independent contractors instead of employees can lead to serious legal and financial consequences for both workers and businesses. The distinction between these two classifications affects taxes, benefits, legal protections, and work responsibilities.

If you're wondering whether you're correctly classified—or if you're an employer looking to avoid legal pitfalls—this guide will break down the key differences and how to determine the correct classification.

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Why It Matters

The difference between an employee and an independent contractor impacts:

• Taxes – Who pays employment taxes and how they're reported.
• Benefits – Employees may receive health insurance, retirement plans, and paid leave, while independent contractors do not.
• Legal Protections – Employees are covered under labor laws like minimum wage and anti-discrimination protections, while independent contractors are not.
• Control Over Work – Employers have more control over employees, while contractors work independently.

Misclassification can lead to penalties, back taxes, lawsuits, and loss of worker protections. Understanding these distinctions is crucial for compliance with employment law.

How to Determine Worker Classification

To determine if someone is an employee or an independent contractor, courts and government agencies apply three primary tests:

1. The Common Law Test (Control Test)

The more control an employer has over how a worker performs their job, the more likely they are an employee.

• Employees: The employer controls how, when, and where the work is done. They provide equipment and training.
• Independent Contractors: The worker decides how to complete the work and may use their own tools or methods.

Example:

A company hires a graphic designer. If the company dictates the designer’s work schedule, software, and daily tasks, they’re likely an employee. If the designer sets their own schedule, uses their own software, and is hired per project, they’re likely an independent contractor.