Employees or Independent Contractors? Learn the Differences!

Employees or Independent Contractors? Learn the Differences!

Do you know the difference between an employee and an independent contractor? At one time, Uber didn’t, which is why one of its drivers sued the ride-sharing entity in 2015 for misclassifying him as an independent contractor. Following a major 2016 lawsuit filed by multiple drivers, Uber was ordered to pay millions of dollars to misclassified drivers in Massachusetts and California.

Unlike the Uber drivers who filed suit, many workers in other fields remain misclassified because they do not know their rights. The IRS once estimated that employers have misclassified millions of employees as independent contractors. While some employers do so because they genuinely don’t understand the difference between the two classifications, others intentionally misclassify their workforces for reasons like the following:

  • They save money because they don’t have to pay unemployment insurance and Social Security for contractors.
  • Contractors are not eligible for company-sponsored benefits.
  • Laws governing minimum wage, overtime, and employment discrimination do not protect contractors.
  • Employers do not have to complete I-9 forms for contractors, making it easier to hide the use of undocumented workers.

So how do you know if your employer (or client) is compensating you fairly? The law is tricky, and we recommend seeking legal advice if you are unclear, but here is some basic information. 

What Is an Employee?

A determination of true employment is determined by a number of factors. In summary, in North Carolina, you are an employee if you perform a core business function and your supervisor controls what work you do, how you perform it, and when you complete it. This standard applies even if you frequently work outside the office.

What matters is not how you are paid, or what the employer calls you, but the degree of control the company exercises over your work. True employees should be, but often are not, paid a regular wage and have taxes withheld from those wages. Their employers should, but often do not, direct them to complete a W-4 form that includes their name, birth date, Social Security number, and exemptions.

Unlike independent contractors, true employees are eligible for:

What Is an Independent Contractor?

If you are an independent contractor, you are hired to achieve a result. Unlike an employee, you control how to achieve that result. The company that hires you may specify that a deliverable be completed by a certain deadline but usually does not require you to work during specified hours or days. Independent contractors also usually – but not always – bring their own equipment, supplies, and materials. 

Unlike an employee, you usually get paid for projects and remit your own taxes. When you work with a client, you provide your name, address, Taxpayer Identification Number, and certification about backup withholding on a W-9 form.

Not all work descriptions and dynamics are this straightforward, however. The line between employee and contractor can sometimes be so fine that the IRS and other agencies use special tests to reach a determination. It is important to note that there is no single deciding factor that tips the scales in either direction: the circumstances must be considered in their full context.

The Right to Control Test

Also known as the ‘Common Law Test’, the Right to Control standard considers the following three factors:

  • The company’s behavior toward you. Are you told when, where, and how the work must be performed? Do they set your work hours, train you, provide equipment and resources, and monitor your performance? If so, you may be a true employee.
  • Your financial arrangement with the company. If you are paid by the project, own your own equipment, and cover your own business expenses, you may be an independent contractor. Be careful here, though! North Carolina law is clear that an employer cannot misclassify a worker simply by paying workers in a certain way. The North Carolina Industrial Commission even established an Employment Classification Division to combat this common problem. 
  • The nature of the relationship. Although ‘permalancers’ are becoming more common, most independent contractors have short-term and project-oriented relationships with their clients. If you perform a key business function (e.g. receptionist, Human Resources) and have been with the same company for a long time, it is probably an employee relationship.

The Economic Realities Test

The Department of Labor uses the six-factor Economic Realities test to determine whether you are an employee or independent contractor. This test examines the financial dependence you have on your employer.

Three factors mirror the standards of the Right to Control test:

  • The employer’s ability to control your work.
  • The financial circumstances of the work arrangement. Do you pay for tools and supplies or does the company?
  • The length of your relationship with the employer. Is it temporary and short-term, or have you been there for a while without a projected end date?

The remaining three factors are:

  • Amount of skill involved. While contractors typically have a special skillset and required to exercise initiative and judgment, employees tend to handle more routine company tasks. While there are certainly skilled employees, if you frequently answer the phone or handle incoming company mail, you are probably not an independent contractor.
  • Level of risk. If you make independent business decisions that could result in a profit or loss, you are likely a contractor and not an employee.
  • Integration. If you provide services that are part of the employer’s regular business, you may have an employment relationship with them.

Contact a North Carolina Workers’ Rights Attorney

If your employer has been misclassifying you as an independent contractor to dodge its responsibility to pay you required wages and benefits, contact the employment law attorneys at Copeley Johnson & Groninger PLLC. We have the legal insights and experience to assess your classification and determine whether your employer has been blocking your access to the wage protection available to employees. To schedule a consultation, contact us today or call 919-646-4220.

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