Employee vs Independent Contractor

LOKK can help your business understand if you have an Employee or an Independent Contractor.  More Importantly, LOKK can assist in ensuring you take the correct preventative steps if you want to ensure that the person in your business are classified within one or the other.

Under the law, before one can determine how to treat payments you make for services rendered, one must first know the business relationship that exists between you and the person performing the services. The person performing the services may be –

  1. An independent contractor
  2. An employee (common-law employee)
  3. A statutory employee
  4. A statutory nonemployee

In determining whether the person providing service is an Employee or an Independent Contractor, all information that provides evidence of the degree of control and independence must be considered.

Under the Common Law, facts that provide evidence of the degree of control and independence fall into the following three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an Employee or Independent Contractor. Some factors may indicate that the worker is an Employee, while other factors indicate that the worker is an Independent Contractor. There is no “magic” or set number of factors that “makes” the worker an Employee or an Independent Contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

If, after reviewing the three categories of evidence, it is still unclear whether a worker is an Employee or an Independent Contractor, the IRS provides a form, Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding”. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status. Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8.

For a business owner, knowing the distinction between an Employee and an Independent Contractor is key. It can make the difference between a future workers compensation claim, having to pay for workers compensation insurance, and more.

To answer more of your question, call and schedule an appointment and a LOKK LEGAL professional can assist.

LOKK has provided an example of both an Employment and an Independent Contractor Agreement for your convenience.  Just click on the links below.

Sample Employment Agreement

Sample Independent Contractor Agreement