Independent Contractor Vs. Employee: What You Need to Know About Proper Employment Contracts

Hiring an independent contractor can be a cost-effective choice for your business, but you could run into legal and financial problems with an improper categorization. Read on to learn more about the differences between contractors and employees, and the importance of properly classifying your workers.

What is a contractor?

A contractor, sometimes called a freelancer or independent contractor, is a self-employed worker who runs their own entity. Contractors work for companies, but they are not actually on their payroll. They have significantly more autonomy and flexibility than employees, but a contractor will not receive benefits like health insurance.

According to the IRS, companies aren’t required to withhold or pay any taxes on payments to independent contractors. Contractors are responsible for paying their own taxes and obtaining any personal benefits, including health insurance.

What is an employee?

Employees are workers who are entitled to benefits and protections under federal, state, and local labor laws. 

These include:

  • The right to minimum wage and overtime pay
  • Anti-discrimination protections
  • Unemployment insurance
  • Unpaid, protected family and medical leave

What happens if you misclassify an employee?

If you misclassify an employee as a contractor, you are denying them benefits and protections that they are legally entitled under labor laws at the federal, state, and local levels. If you misclassify without reasonable basis, you will be required to pay unemployment taxes, immediately become the liable employer, and will face future audits to ensure your compliance.

If this misclassification continues, you could be liable for penalties that are 4x the amount of taxes owed on the misclassified wages. In extreme cases, businesses can face criminal penalties.

You may also be vulnerable to legal issues or lawsuits from those harmed by misclassifications.

How do you avoid employee misclassification?

Although every business and situation is different, there are a few best practices for avoiding misclassifying your workers. Consult legal counsel during the contract writing process to ensure that you’ve properly classified your workers, and to ensure that the contract doesn’t violate any local, state, or federal labor laws.

In general, it is important to be in compliance with labor laws, which may vary from state to state and country to country, if you are working with global contractors. An experienced business lawyer can help you navigate the rules and regulations.

Talk to the Business Lawyers at JAD Law

If you’re concerned that you may be misclassifying your employees, an experienced business lawyer can help you determine your current standing. JAD Law is here to help. Contact JAD Law today to schedule an appointment.

JAD Law serves several counties across Metro Detroit, Michigan, including Macomb, Oakland, St. Clair, and Wayne counties.