Employee or Independent Contractor? An Employer’s Guide

Broadly speaking, the rule of thumb to keep in mind is that if you, as the person paying the worker, have the right to control or direct only the result of the work, but not how it gets done, then the worker may be an independent contractor. 

On the other hand, if you have the right to control or direct details of how the service is performed, you will likely have hired an employee.

However, this rule of thumb is just that, and it is not always applicable to every situation. In determining whether a person providing service is an employee or independent contractor, small businesses should consider all information that offers evidence of the degree of control and independence in the relationship between the employer and worker. 

You should consider three areas: Behavioral control, financial control, and your relationship with the worker. 

Behavioral control categories are:

• Type of instructions given. When and where to work, what tools to use, or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate that a worker is an employee.
• Degree of instruction. More detailed instructions may indicate that the worker is an employee. Less detailed instructions reflect less control, indicating that the worker is more likely an independent contractor.
• Evaluation systems to measure how the work is done point to an employee. Evaluation systems measuring just the result point to either an independent contractor or an employee.
• Training a worker on how to do the job — or periodic or ongoing training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

When it comes to financial control, you should consider: 

• Significant investment in the equipment the worker uses in working for someone else.
• Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
• Opportunity for profit or loss is often an indicator of an independent contractor.
• Services available to the market. Independent contractors are generally free to seek out business opportunities.
• Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time, even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.

Lastly, the type of relationship depends on how the worker and business perceive their interaction. This includes:

• Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
• Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay, have employees. Businesses generally do not grant these benefits to independent contractors.
• The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
• Services provided are a key activity of the business. The extent to which the worker performs services is seen as a key aspect of the company’s regular business.