Employee or Independent Contractor? Why Does It Matter?

Besides tax matters (independent contractors pay their own taxes and employees have taxes withheld in their paychecks by employers), there are a variety of other reasons why the distinction matters.

First, contractors are governed primarily by contract law. They must fulfill the contract or they may be in breach. On the contrary, employees are in an at will relationship with their employer. Either the employer or the employee can decide to end the relationship. If that occurs, they won’t necessarily be in breach (because it’s at will).

Second, employers are often vicariously liable for employees. This means that if the employee does something during the job that creates liability, the employer and/or company will most likely be responsible. Independent contractors on the other hand are often liable for their own liabilities. The person employing them/hiring them in a work for hire situation will not be vicariously liable. Note these are generalizations and it depends on the facts of each situation.

Independent contractors expect to work for the term contracted for and that’s it. This could be for one project, 3 projects, or for a time period like 3 months. Alternatively, while the employment situation is at will, it has a perpetual appearance in nature. Meaning, an employer doesn’t typically say do one project and then I’ll ask that you quit. So, generally if your work is project oriented and maybe is busy one month but then not for four months, you may want to hire a contractor instead of an employee. The employee would require regular hours and regular pay.

There are of course other considerations to think about. For example, are you providing your employee tools to do their work (ie. computer, desk, place to work, etc)? If you are not and they must provide everything, you may be treating them like a contractor and not an employee. What you call someone is not always indicative of what they are. It’s what the relationship looks like, the pay looks like, the schedule, and several other things.

Michael Jonas