Employee Or Independent Contractor – A Critical Distinction

loft with meeting tablesFrom WilmingtonBiz, Benton Toups, attorney at Cranfill Sumner & Hartzog discusses the distinction between an employee and independent contractor.  He identifies a number of criteria to help determine if a worker is an independent contractor or employee.  Benton also write about the implications of the classifcation.  He writes:

“The independent contractor versus employee distinction has wide-ranging implications for businesses. Below are some of the most important:

  • Taxes – This is a big one. Employees are subject to payroll withholdings and issued a W-2. Independent contractors are subject to no withholdings and issued a 1099.
  • Workers’ Compensation – Employers with at least three employees must carry workers’ compensation insurance coverage. Employees injured on the job are entitled to workers’ compensation benefits.
  • Employment discrimination laws – Most kick in only after a certain number of employees work for the employer
  • Vicarious liability – Employers are liable for damage caused by their employees acting in the course and scope of employment.
  • Wage/hour laws – Recordkeeping, minimum wage, and overtime regulations apply to employees but not independent contractors.

There is certainly temptation to classify workers as independent contractors rather than employees. It’s easier, and it’s cheaper, at least in the short-term. However, misclassification of employees as independent contractors can quickly become an expensive mistake in the event of an IRS audit or an uninsured workplace accident. When the circumstances are such that the distinction between independent contractor and employee is unclear, it becomes a matter of risk tolerance for the business owner. Classification of workers as independent contractors is always cheaper (again, at least in the short term), but classification of workers as employees is always safer. It’s often a tough call…”

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