Who is an Independent Contractor and Who is an Employee?

September 30, 2016

What is an independent contractor? How does a worker know if they are supposed to be an independent contractor or an employee? To determine a worker classification, one must look at the relationship between the person preforming services and the employer. An independent contractor classification is not something that can be defined by a job description.

An employee is generally defined as someone who is economically dependent on the employer, whereas an independent contractor is defined as someone economically dependent on themselves with the business employed as a client. Courts make this distinction by using what they call the “economic realities” test based on the definitions provided in 29 U.S. Code § 203.

Walling v. Portland Terminal Co. even went so far as to determine the exact definition of a “trainee” and what benefits coincide with that classification.

When a company or employer does not clearly follow the guidelines, and mislabel a worker, several problems come into play:

Misclassifying Workers

First, some companies intentionally misclassify workers to cut costs. In 2015, the Wage and Hour division won $74 million in back pay for workers who were misclassified. In January, one investigation discovered that hotel workers in Georgia were owed more than $280,000 in back wages.

Denied Benefits

Second, employees can be denied needed benefits such as overtime compensation and healthcare if they are labeled independent contractors. In some cases they are even denied minimum wage and unemployment insurance. This can generate severe losses to tax revenues on a federal level. It can also impact state unemployment insurance. Independent contractors are not subject to other laws employees are subject to, like discrimination and payroll taxes.

Undermining the Economy

Third, it mislabeling a worker can undermine the economy. If workers are not being paid what they are owed, a web of issues associated with the amount of income they are cycling back into consumer goods ensue. This creates lower revenue for businesses and hurts the overall economy.

The rules for determining an independent contractor also very by state. For example, in Georgia, a modified applicable test is used, and a worker is considered an employee once the person has received compensation for services. This is important to note, because once a worker is determined an employee it is required that unemployment taxes be paid.