Legal Differences Between Employees and Contractors

 Understanding the legal differences between employees and contractors is about more than semantics. If employees and contractors do not understand their responsibility. Then your organizations can land in hot water.

We have seen this in landmark employment tribunals. One of the most prominent examples for this is Uber. They went to court after misclassifying workers as self-employed.

So, what is the difference between a contractor and an employee? How can organizations treat their workers fairly and avoid legal action?

The definition of employee or contractor

The differences between contractor and employee can present some semantic arguments. For example, according to the UK’s HMRC:

An independent contractor works for a client under a service contract. One the other hand. An employee works under a service contract.

See how only two small words can make all the difference. But there’s more to it than that. To distinguish an independent contractor vs an employee. We would look at the person’s role within an organization.

What is the difference between employee and independent contractor?

Let’s look at how you might define each role separately.

The role of an independent contractor agreement typically comprises working on a specific task or project. They do not have an employment relationship with the company. This means they have more freedom over what they do. But still they are doing your work and are responsible for delivering a product or service.

They may have a particular skill set. As they are on contract. They can work for a specific time period. For example, for the duration of the project.

The most important difference between an independent contractor and an employee is that. Independent contractors have the right to substitute themselves for somebody else. For example, an employee in the contractor’s own business.

The role of an employee

An employee has less autonomy than a contractor. They are employed. And they are answerable to their line manager. They are contracted under certain hours (though this may be more flexible with some employers than others.) Lastly, they work under the guidance of their manager.

What are the penalties for misclassification?

If you don’t classify workers correctly. You may find that there are several potential consequences. These might like financial losses from fines or penalties, or breaching employment law. It can also face reputational damage for treating workers incorrectly. In severe cases can lose licenses or regulatory approvals.

So my advice is to have a legal template in your hands. They are customizable. This means you can change the data in the way you like to. So if you are working with a contractor then do use an independent contractor agreement.

So what do we know now? That working with an independent contractor is often a good idea. You can classify them correctly without risking penalties.

Independent contractor vs employee: The key differences

There are several things to consider when looking at the differences between contractor and employee.

Working practices

How are the working practices defined? For an employee, you will set specific working hours per week. You can also have a total number of hours per day. Yes, you will have control over day-to-day schedules. Most of the time you’ll have to provide an office for the worker. But remote working is also increasing.

On the other hand, An independent contractor will usually work on their own schedule. It can be remote, and on a short-term basis.

The contractual worker status.

Do you have a contract in place? Employees receive a written contract following employment law. It covers many legal and working issues. With a contractor, you may have no contract at all. Independent contractors run their own businesses. In this case both parties have fewer protections in a contractor relationship.

How and when you pay

Next, consider how you pay the worker. Employees usually agree on a yearly salary or hourly rate. Their wages and pays should be according to laws around remuneration including minimum wage. Employees’ compensation is generally paid at the same point on a regular schedule.  However, this depends on the laws of the country. In some countries’ labor law, the specific date of payment is defined.

Contractors’ payments will be whatever is agreed with the client. It is usually defined in a contract.

How you manage taxes

Are you involved in the worker’s tax affairs? In many countries, employers will manage their income tax, national insurance and other employment tax contributions. In others, such as Hong Kong and Singapore, employees have to submit their own tax returns. An independent contractor manages their own taxes.

The benefits you provide

Are there any benefits for the worker? For employees, benefits range from:

• Pension plans
• Health insurance
• Childcare allowance
• Professional development
• Fitness or health and lifestyle incentives
• Flexible and remote working options
• Life insurance.

It’s strictly a business relationship. Independent contractors do not receive benefits. Contractor handles their own pension, insurance, and other allowances.

The equipment you provide

Do you provide the worker with equipment to do the job? For example computing equipment for them to work. This can also include office space. This means employees can use them. The independent worker will usually provide their own equipment. As being independent they often work offsite.

How you manage the schedule

Do you set the work schedule? In an employment relationship, you can control an employee's daily schedule. You can select working hours with an arrival and finish time. Independent contractors, on the other hand, are their own business owners. So they usually work according to their own schedule.

How you manage expenses

Finally, how do you pay business expenses? Employees use a company card to cover expenses or pay out of pocket. Normally reimbursement is included with their regular paycheck.

An independent contractor has their own small business. He/she will run business expenses through it. When working for a company, sometimes there is an agreement that contractors can claim some expenses. They will invoice the company for business expenses.

Employee or contractor?

After discussing everything now we will see the differences between employees and independent contractors:

If you provide any equipment, benefits, or support.

How much control you have over schedules

How and when you make payments