An independent contractor is an entity (whether an individual or a business) that performs services for another entity under some agreement, in exchange for compensation, free from the “control” of the entity paying for the services. An independent contractor is typically thought of in contrast to an employee or as self-employed. This is mostly an accurate understanding, although an independent contractor can become an employee temporarily or even permanently based upon the conditions during the services performed.
Normally an independent contractor freely contracts to provide services with another party. The independent contractor works under his or her name or business name, uses some or all of their own equipment, does their own accounting, pays their own taxes, etc. The independent contractor’s connection to the party employing it is limited to the terms of the service agreement. By contrast, employees typically work under the employer’s name, conform to its workplace standards, use its equipment, the employer pays wages and payroll taxes, etc. However, there is no clear division between the two for any of these reasons. An independent contractor might use the other party’s equipment and follow a schedule set out by it but still acts independently enough to be an independent contractor.
The significant division between an employee and an independent contractor is the degree of control the employing party may exercise. (Note: in Texas, it is not the degree of control exercised, but the degree of control that MAY be exercised.) Although there are different tests used by different laws, the most common test in Texas is the common law “right to control” test. Essentially each test looks at several factors (such as those listed in the last paragraph) to determine how freely the independent contractor operates.
In my head, the first thing I think about is how much the employing party controls the day to day (or minute by minute) business practices of the employee/ independent contractor, because this is really at the heart of the “control” standard. If you are an employee of a business, or have ever been, you are probably familiar with how many issues and how detailed an employer can be in setting standards for how you act in the workplace. On the other hand, when you are an independent contractor, the employing party should have much, much less control over those minute details.
The second thing I think about is whether the employee/ independent contractor had an opportunity to consider and negotiate the controls put in place by the employing party. When you are an employee, the employer makes all those decisions; you either accept them and keep working or you quit. You seldom have an opportunity to make decisions or negotiate over those details. However, as an independent contractor you should have contemplated the terms of the services and those controls should be stated in the service agreement. (Poorly written agreements may be less clear.)
Although not the way the law contemplates the difference that is a very basic way of understanding the difference. The actual facts, once plugged into the proper legal test, may result in a different conclusion. The determination can be complicated when the employee or independent contractor falls somewhere in the middle.
Employers commonly attempt to classify employees as independent contractors because having employees classified as independent contractors presents financial and liability opportunities for them. Employers have to pay payroll taxes for employees and often have to pay overtime wages, unemployment benefits, workers compensation, benefits, hourly rates or salaries, and generally have more accounting for employees. All of that contributes expense to the employer. For an independent contractor, none of that has to be paid. The independent contractor receives the agreed fees and that’s it. Additionally, employers are liable for the acts of employees when an employee harms other people or property (and in some cases makes binding contracts) while acting in the scope of his or her employment. On the other hand, an employer typically is not liable for the acts of an independent contractor. At a minimum the opportunities for an employer to be liable for the acts of an independent contractor are fewer.
This creates a strong set of incentives to misclassify employees as independent contractors. The effect on workers who are misclassified can include lost benefits, lost opportunities for raises and bonuses, potentially lost overtime pay, unemployment insurance access, workers compensation, liability coverage through the employer and other benefits of being an employee. The effect can be substantially worse when somebody is misclassified but does not treat themselves as an independent contractor by making financial decisions like a self-employed person.
If you believe you have been misclassified as an independent contractor by your employer, you should speak with an attorney to help determine if your classification is appropriate and if it is not, what remedies may be available.