What is the difference between an employee and an independent contractor?

Despite what most may think, the distinction between an employee and an independent contract is an important one, and the classification can have major consequences.

A worker is an employee if the employer has the right to control how the worker performs his job. By contrast, a worker is an independent contractor if the employer cannot exercise control over how the worker performs his job. While courts may consider other factors such as method of payment, provision of employee benefits, and who provides the tools and facilities for the job, the right to control how the work is performed is the key factor.

For example, a travelling salesman who pays his own expenses, is paid on commission, and controls what territory he will cover on a day to day basis with no supervision is an independent contractor. Similarly, a limousine driver who provides his own limousine, determines when to start working and for how long to work, is free to reject passengers, and can work for more than one employer is an independent contractor.

On the other hand, a salaried secretary who uses a company computer and phone, is given paid vacation, and directed as to how he should answer the phones and treat customers is an employee.

The above examples are the easy cases—where all of the factors point in one direction. The difficult cases are in the middle, where a worker’s tools are all provided by the employer but the worker is free to set his own hours. While no one fact is determinative, whether a worker is an employee or independent contractor will ultimately come down to how much control the employer can exercise over the worker.

Consequences of Classification

Independent contractors generally have fewer rights than employees. They are not protected under many federal statutes including Title VII which prohibits discrimination based on race, gender, religion, or national origin, the ADEA which prohibits discrimination based on age, and that ADA which prohibits discrimination based on disability. In Texas, the Texas Commission on Human Rights Act similarly protects workers from discriminations, and it too only protects employees.

Further, independent contractors have to pay their own Social Security, Medicaid, and Medicare taxes. They also must pay their own FICA taxes because their employers do not have pay those taxes on behalf of independent contractors. Also, employers of independent contractors need not pay minimum wage or overtime, have no obligation to provide unemployment insurance or workers’ compensation, and can avoid labor disputes because independent contractors have no right to organize and bargain collectively.