Dependable Dan works for Courteous Construction Company (CCC) and has for years, off and on, depending on workload. He shows up for work every day at 7 a.m. and works until 5 p.m., just like his boss asks. He carries some of his own tools, but CCC supplies him with the rest. His boss doesn’t hover over his shoulder all day, but at the end of each day, he inspects Dan’s work to make sure it is up to standards.
Is Dan an employee, or is he an independent contractor? The distinction has huge implications.
Employee versus Independent Contractor: How to Tell the Difference
Unfortunately, there is no easy, bright-line rule for determining who is an employee and who is an independent contractor. I frequently hear business owners say things like, “I pay him on a 1099, so he’s an independent contractor.” This is a common misconception. While it is true that independent contractors are properly paid on a 1099 and not a W-2, payment on a 1099 does not make the person in question an independent contractor. It is simply one effect of the classification of the individual as an independent contractor.
Courts and various government agencies apply different tests to draw the distinction, depending on the purpose for the classification; however, the more of the below criteria an individual meets, the more likely he is properly considered an independent contractor:
(a) engaged in an independent business, calling or occupation;
(b) exercises independent use of his special skill, knowledge, or training in the execution of the work;
(c) does a specified piece of work at a fixed price or for a lump sum or upon a quantitative basis;
(d) not subject to discharge because he adopts one method of doing the work rather than another;
(e) not in the regular employ of the other contracting party;
(f) free to use such assistants as he may think proper;
(g) has full control over such assistants; and
(h) selects his own time.
No one, single factor is determinative. Ultimately, it boils down to control. The more control the principal exercises over the work of an individual, the more likely that individual is an employee. The less control the principal exercises over the work of an individual, the more likely that individual is an independent contractor.
An Important Distinction: Implications of this Classification
The independent contractor versus employee distinction has wide-ranging implications for businesses. Below are some of the most important:
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