Are you an employee or an independent contractor? And why it matters

The nature of work is changing with serious long lasting consequences for both employers and workers.

A March 2016 study published by Princeton University economist Alan Krueger and Harvard University economist Lawrence Katz, found that nearly all of net job growth from 2005 through 2015 was in alternative work arrangements – temp jobs, on-call workers, freelancers, and independent contractors.  This suggests a chunk of traditional employment is being replaced by jobs in the contingent economy. The study lays out several possible factors for this shift, including an aging population and technological changes in the workforce.

Head of the Wage and Hour Division at the US Department of Labor, David Weil, says that part of this trend is due to the “fissuring” of the workplace, with businesses misclassifying employees as independent contractors or employers redefining work to justify switching to a contingent workforce.

When workers are misclassified, they aren’t entitled to benefits like workers compensation and unemployment insurance.

Here’s what you need to know about being an independent contractor vs. an employee

Are you an independent contractor?

It can be tricky to figure out if you’re an independent contractor, because there’s no set definition. Courts and enforcement agencies look at several factors involving the relationship between the worker and the company to determine if someone is an employee or an independent contractor.  Read those factors here.

David Weil describes it this way:

If you’re an independent contractor, it’s you who are making the decisions about pricing, about the market you are competing in, about the nature of your product, about where and how you will take on new customers or what you will do if you lose a customer. And ultimately it means that you, by your own decisions as an independent contractor, are making decisions that have direct effects on the profit or loss of the enterprise you’re engaged in.

Are you engaged in a set of activities where you, yourself, are making those judgments –  that whole suite of decisions that ultimately allows you to figure out are you going to be profitable or not? Are you going to be successful in that business or not? Or are you someone who might be bringing lots of skills knowledge activities to your organization, but you, yourself are not ultimately going to be the person responsible for that whole set of decisions?

Are you an employee?

According to Weil, an employee is a person who is:

Economically dependent on the decisions of the person or people they’re working for in terms of a whole variety of things that go on in terms of that business: What the business does, how decisions are made around everything from pricing to production to quality, to creating the opportunities for profit or loss that affect that business.

If you are working for someone who is making those determinations and what you do is dependent on that, you’re in an employee relationship.

And if you think about that, that means the vast majority of people in workplaces, are actually employees.

Why does it matter?

An independent contractor does not have the same benefits and protections as an employee.

Here’s what Weil says:  

If you are an independent contractor and you are injured, you’re not covered by worker compensation systems, so that injury is now solely your own personal risk. If you’re an independent contractor and you lose your job, you are basically unprotected from unemployment insurance. But as an independent contractor, you are out of that system. So those are all examples of risks you are taking on as an independent contractor.

We’ve designed various employment social safety net features precisely to protect you. And we protect people in employment relationships, because most people in employment relationships are, as I’ve said before, economically dependent on their employer and have less leverage and they have less ability to protect themselves. That’s why, historically, we’ve used the employment relationship as a way to make sure people in the workplace can be assured certain basic standards and protections.

Misclassification is common

Misclassification occurs when your employee pays you as an independent contractor rather when you are an employee. There are both state and federal laws that address misclassification. The California Dept. of Labor defines willful misclassification as: “voluntarily and knowingly misclassifying an employee as an independent contractor.”

According to the Dept. of Labor:

Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. It hurts taxpayers and undermines the economy.

If you think you might be misclassified as an independent contractor, this website can help. 

(Photo: Laith Al-Majali)