With the recent class action lawsuit involving Uber, drivers who feel they have been misclassified as independent contractors have brought the topic of Independent Contractor vs. Employee classification to the forefront. What is an independent contractor? How is it different than an employee?
It sounds like the optimum situation – be your own boss, control when and where you work. However, it is not so simple. First, let’s look at the positives. Independent Contractors are their own boss; they can create their own schedule and take on as much or as little work as they choose. While employees are limited by their salaries, independent contractors have no limits or barriers to the amount of income they can earn. There are tax benefits, such as being able to deduct business expenses for equipment, travel, etc.
One of the biggest negatives to being an independent contractor is the lack of employee benefits – no paid health insurance, no unemployment benefits, no sick days, and no paid vacations. Also, there is very little job security; there is the need to constantly bring in new business. Lastly, and quite importantly, are the increased taxes you pay as an independent contractor (double the Social Security and Medicare taxes than an employee).
Employers need to be careful when classifying someone as an independent contractor. The primary test is how much control the company has over the worker. The IRS has a 3-factor test to determine employee status:
1) Behavioral – does the company have the right to control how the person performs his/her job?
2) Financial – how is the worker paid, are their business expenses reimbursed?
3) Type of Relationship – is there a written agreement specifying an independent contractor relationship? Is it a permanent relationship? And are the services provided integral to the core business activity?
With all 3 of these, the amount of control is the determining factor in determining employee status.
Often times people choose to become independent contractors as a way of “testing” out various companies that they are interested in. An alternative to being self-employed is to work as an employee of a staffing agency on short-term assignments in your field of expertise. This gives you the benefits of being an employee, while also allowing you to work at various companies before making a long-term commitment. Contact us at Innovative Career Resources today to see what jobs we are offering for our clients and you can decide if being an independent contractor or employee is right for you!