Employment Basics: Employees and Contractors

If you run your own business, you have likely encountered the terms independent contractor and employee and you may not know that there are very different legal implications for either type of worker. Thus, you should determine if you need to hire independent contractors or employees, if you are starting up a new business.

What Is an Independent Contractor?

An independent contractor is a worker that is typically independent from your main or core business. Very often independent contractors include workers that do not have a permanent position, work only on special projects, or only work when needed. This is not a complete list of the types of independent contractors or their potential iterations within your business. Further, any independent contractor in your business should have a written agreement in place that lays out the rights and responsibilities of the contractor. 

Additionally, you must ensure that your relationship and agreement with the contractor does not involve too much control over the contractor, which could lead to the contractor being classified as a employee. An independent contractor will likely be in control of their schedule, will not have a set amount of hours, will not have taxes deducted from their payment, and usually are not permitted fringe benefits of the company. Further, your company should issue an IRS form-1099 to the contractor. Your company should also consider suggesting that your independent contractors obtain insurance to cover their actions as they will likely not be covered under your typical business insurance.

What about Employees?

As a company, you will normally have more control over the actions and direction of the employee. The laws regarding employment vary by state, but at-will states can hire and fire for any reason. However, a written employment agreement can change this basic rule. An employment agreement should cover the rights and responsibilities of the employee and company and any other special provisions for which you would like to bind the employee. 

Employees will typically have a set schedule each week, will report for a certain number of hours, will have taxes deducted from their payment and are typically entitled to fringe benefits of the company. Further, your company will likely need to invest in worker’s compensation insurance coverage for those employees, or file an opt-out. Worker’s compensation is handled differently in each state and those laws should be taken into consideration before deciding whether to bring on employees or independent contractors.