Employee vs. Contractor: What’s the Difference?
The question of how to differentiate between employees and independent contractors is among the most common—and most difficult—causes of legal disputes in the field of employment and labor law. The idea that an employer would misclassify a worker as an independent contractor in order to cut back on costs is not new. If an employer hires an independent contractor instead of an employee, they are not required by the Fair Labor Standards Act of 1938 (FLSA) to pay the worker minimum wage or overtime. The employer is also free from some recordkeeping requirements when they work with independent contractors and they can avoid paying payroll taxes, so it has always been tempting for employers to misclassify workers in this way.
However, avoiding these obligations can cost both employers and employees more in the long run. The IRS has specific guidelines that help determine if an employer has misclassified a worker. According to the U.S. Department of Health and Human Services, to determine whether an individual must be classified as an employee, the employer needs to consider the following questions:
- Does the company control or have a right to control what the worker does and how the worker does their job?
- Does the company control the business aspects of the worker’s job? This would include arrangements such as how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.
- Is there a written contract or employee benefits like a pension plan, insurance, or vacation pay?
- Will the relationship continue and is the work a key aspect of the business?
Ever since the massive wave of unemployment that happened as a result of the novel COVID-19, it seems that the differences between an employee and a contractor have never been more important. Some confusion arose during the midst of the pandemic when many independent contractors lost work and had to file for unemployment, only to face even more challenges when it came to qualifying for those benefits.
New COVID-19 Regulations and How They Impact Independent Contractors
In an attempt to clear up some of this uncertainty, in late 2020, the Trump administration launched the “Independent Contractor Status Under the Fair Labor Standards Act” that focused on the control an employer has over an individual’s work. The ruling affirmed that independent contractors were not employees under the FLSA and were not entitled to minimum wage or overtime pay under the Act.
However, in May of 2021, the U.S. Department of Labor announced the withdrawal of the “Independent Contractor Rule” to maintain workers’ rights to the minimum wage and overtime compensations of the Fair Labor Standards Act. U.S. Secretary of Labor Marty Walsh explained that the intention of withdrawing the Independent Contractor Rule was to help preserve essential worker rights and to stop the erosion of worker protections that would have occurred if the rule had gone into effect.
Walsh stated, “Legitimate business owners play an important role in our economy but, too often, workers lose important wage and related protections when employers misclassify them as independent contractors. We remain committed to ensuring that employees are recognized clearly and correctly when they are, in fact, employees so that they receive the protections the Fair Labor Standards Act provides.”
By withdrawing the rule, the department anticipates avoiding a reduction in workers’ access to employer-provided benefits like health insurance and retirement plans, as well as unemployment and workers' compensation coverage. Hearing about enhanced worker protection is music to our ears at Shellist Lazarz Slobin LLP, as we strive every day to achieve the best outcomes in employment law cases.
If you have any questions about how previous or new employment rulings might apply to you, or need help with another employment law matter, reach out to the team of Shellist Lazarz Slobin LLP at (713) 352-3433 or contact us online.