Is He or She actually an “Employee”, or an “Independent Contractor”?
After you start your business, you will eventually need to hire someone to help you with the work. This is a momentous occasion in the life of your business. But hiring someone else comes with certain responsibilities, such as withholding payroll taxes and providing health insurance coverage in some cases.
The first question to ask yourself is: “Is he or she actually an “employee” or an “independent contractor”? It’s important to understand the difference between these two types of workers. Employees are treated differently under employment law (and have more rights) than independent contractors. These can include the right to benefits in some cases and entitlement to overtime pay (to be discussed in later posts).
Generally, determining whether someone is an “employee” hinges on the type and amount of control that you, as the employer, exercise over the employee.
Key Characteristics of Employees:
The following are some of the most prominent characteristics of what makes a person an “employee”. If you and your company have the following rights and abilities, then that person is most likely an “employee”:
- You choose when, where and how work for your company is done;
- Your company provides an office space, tools, and/or office supplies for the person to work for you;
- You, or another member of your company, directly supervises the person’s work and performance;
- Your company sets the rate of pay for the work, which your company then pays by a monthly or weekly salary, or by the hour;
- You have the right to review, evaluate and approve the person’s work;
- You have the ability to have the person be present at meetings, in an office, or at training sessions;
- You, or another member of your company, have the right to approve any time off; and
- You have the right to hire and fire that person.
Key Characteristics of Independent Contractors:
In contrast, “independent contractors” are not controlled as much as an employee. They are, in fact on a day-to-day basis, free from your company’s supervision and direction. Independent contractors are able to have more freedom because they are in business for themselves as they offer services to the general public. There are some key factors that indicate that the person you hired is most likely an independent contractor. They don’t have allegiance to just your company and can work for other companies, including your competitors in the same industry. They usually have an established business of their own, which they advertise, host a website and have business cards for, have their own office space and tools/computers, and carry their own insurance. Independent contractors also have the freedom to set their own rates for work performed and choose whether or not to accept certain projects and tasks. They are also usually responsible for their own profits and losses.
Firstly, remember, employment laws are created to protect workers, who are in a weaker bargaining position. So while you and your business have some freedom to contract with workers, you can’t just classify an employee as an “independent contractor”. In other words, if you treat someone like an employee, then they’re an employee. Having an employee sign a contract stating that he/she is an “independent contractor” doesn’t make that person an independent contractor. Your business would still be liable for complying with employment laws.
Secondly, it’s important to evaluate from the beginning your company’s needs and its bandwidth for taking on employees. Does your company need to take on employees? Is it possible and more cost effective to hire another service company to perform certain specific tasks? Is it necessary to control the main aspects of the work to be done? Does your company have the resources to (1) pay for a salary or only on a project basis, (2) foot the costs for health insurance and a payroll service? At the same time, it’s essential to also evaluate what kind of help you need – is your company ready to invest in its work force or can it get by for longer with temporary help on a project basis?
This evaluation is a good step towards hiring your first employee and ensuring that you are in compliance with basic employment law regulations.
For more information on independent contractors and employees, please contact the Moisan Legal team.