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Wage & Hour Laws

Independent Contractors & Employees: Do You Know the Difference?


By Shelley Kilpatrick May 26, 2016

employees independent contractor

Right now ride-sharing giant Uber Technologies Inc. is facing a class-action lawsuit over the way it classifies drivers. The company has made millions of dollars in profits due to its 1099 independent contractor business model. But some drivers aren’t happy, arguing that they should be classified as W-2 employees. The drivers feel that Uber has too much control over how and when they work.

The Risks of Misclassifying Independent Contractors

These days more and more businesses are relying on independent contractors. In fact, a recent study, “Freelancing in America:2015” commissioned from the Freelancers Union and Upwork, reports that nearly 54 million Americans (34 percent of the U.S. workforce) are working as freelancers/independent contractors.

But incorrectly classifying employees as independent contractors can put your company at risk for several compliance violations. Here are two examples from recent cases.

Small business fails to pay taxes

Businesses are responsible for matching the payment of certain taxes like social security for employees. Tya Bolten, a small business owner, unknowingly misclassified her employees when she started her business. So when one of her former independent contractors filed for unemployment, she was blindsided when the Maryland Department of Labor, Licensing and Regulation ordered her to pay thousands of dollars in payroll taxes.

FedEx violates wage laws

The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay and recordkeeping, among other things. For example, covered nonexempt employees are entitled to overtime pay once they have exceeded working 40 hours.

Overtime was just one of the benefits delivery drivers sought out in their lawsuit against FedEx. After almost 10 years of fighting in court FedEx lost the legal battle over its practice of classifying delivery drivers as independent contractors instead of employees. In June 2015, the company agreed to settle with the drivers for $228 million.  

Distinguishing Between Independent Contractors & Employees

There are no set restrictions on how to differentiate between independent contractors and employees. However, IRS identifies three categories that can help you make the determination: behavioral, financial and type of relationship.

Behavioral: Control over how and what the worker does.

As a general rule, an employee is restricted as far as how, when and where they complete their work. On the other hand, independent contractors have more freedom to determine how, and on what time table, they will get the work done. Here are some questions to ask to help make the determination:

  • Is the worker required to be at the office at a certain time every day?
  • Can the worker hire an assistant to help with their workload?
  • Who is responsible for providing the tools or equipment required to do the work?
  • How is the worker evaluated on their performance?
  • Are you providing training that determines how the work is done?

Financial: Control over the economic aspects of the worker’s job.

Independent contractors usually have significantly more invested in tools or equipment used to get the job done. Also, they are usually paid a flat fee for their services. Here are some questions to ask to help make the determination:

  • Has the worker invested in equipment and facilities used to get the work done?
  • Is there economic risk (profit or loss) as a result of the work?
  • Can the worker advertise their services and seek out other business opportunities?
  • Is the worker guaranteed a regular wage amount on a set date?

Type of Relationship: How do the worker and business operate together?

Employees usually expect their relationship with a business to last indefinitely and that the business will provide them with health insurance, paid time off and a retirement plan. Here are some questions to ask to help make the determination:

  • Is there a written contract between the worker and the business?
  • Is the work expected to be completed within a set period of time?
  • Can the worker quit or be fired at any time?

Correctly Classify Workers & Reduce Your Risks

There are significant penalties to misclassifying employees including lawsuits and fines. Make sure you understand the differences between independent contractors and employees to help reduce your compliance risks. And check out or wage and hour training for more information on correctly classifying employees.

As for Uber, the case is still pending. But what do you think? Are they correctly classifying workers?

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