Even the simplest details matter when trying to stay compliant with federal, state, and local employment laws—for instance, misclassifying an employee as an independent contractor could be enough to get a business into serious legal trouble. Here’s the difference between an employee vs contractor.

In fact, the U.S. Department of Labor recently proposed a new rule changing the way employees and contractors are classified, making it all the more important for employers to understand the difference between the two. Really, it’s just one of the many laws employers need to understand if they want to avoid the fees and legal consequences associated with noncompliance.

Let’s take a look at how the employee classification rule is changing, and what employers need to know to stay compliant.

Why does it matter?

The classification of an employee vs contractor isn’t just a matter of semantics, and here’s why: employees are eligible for certain protections under the Fair Labor Standards Act (FLSA), and these protections don’t apply to contractors.

Employers are also required to pay taxes on employees, but not on independent contractors. For this reason, employers that misclassify workers could be charged with tax evasion and face serious fines and legal repercussions.

What’s changing?

In short, the newly proposed rule widens the definition of what constitutes an employee vs contractor. This means some workers currently classified as independent contractors could now be considered employees, giving them new protections and benefits under the FLSA.

The old law emphasized  two factors in classifying a worker: (1) the workers’ control over their own work, and (2) the worker’s opportunity for profit and loss. The new rule would reinstate a test long used by the court, which takes a broader look at overall circumstances and uses six factors to classify workers.

What is the difference between an employee and contractor?

The new law classifies workers based on the “economic reality” of the working relationship.

When a worker is determined to be “economically dependent” on their employer for work, they’re considered an employee. On the flip side, when a worker is determined to be “in business for themself,” they’re considered a contractor.

Here are the six factors employees must now consider when distinguishing between an employee and a contractor:

  • Opportunity for profit and loss. Does the worker have control over how much money they earn? Do they have the right to turn down assignments, negotiate pay, or choose when they complete jobs? If so, they’re more likely to be considered an independent contractor.
  • Investment by the worker and employer. Has the worker invested in tools that reduce their costs, enhance their ability to work, extend their market reach, or are otherwise entrepreneurial in nature? If so, they’re more likely to be considered an independent contractor.
  • Degree of permanence of the working relationship. Is the worker hired on an indefinite, continual basis? If so, they’re more likely to be considered an employee. If the work is for a set amount of time or is more sporadic, the worker is more likely to be regarded as an independent contractor.
  • Nature or degree of control. Does the employer control the worker’s schedule, rates, services offered, etc.? If so, the worker is more likely to be considered an employee.
  • Extent to which the worker is integral to the business. Is the worker’s role critical to the operation of the business? If so, the worker is more likely to be considered an employee.
  • Degree of skill and initiative shown by the worker. Is the worker dependent on the employer for training and development of specialized skills? If so, the worker is more likely to be considered an employee.

While none of these factors is dispositive, their relative weight contributes to the final determination.

How does the new law affect employers?

With the new rule, employers could miss out on the financial perks of classifying a worker as an independent contractor, since many of the workers formerly considered contractors could now be regarded as employees.

While this reclassification would require employers to spend more money on payroll taxes and Social Security, the cost of noncompliance could be even greater.

Take the guesswork out of employment documents

Offer letters, employee handbooks, and employment agreements are already complicated. But when employers are hiring across all 50 states, drafting these documents becomes even more stressful because employment law can vary widely from state to state.

Don’t risk misclassifying workers. Ensure compliance by letting SixFifty help you write your employee handbooks, agreements, offer letters, and more. Generic templates put your business at risk, and our customized documents give you the expertise of the nation’s top legal counsel.

Gain confidence and peace of mind with all your employment docs. Schedule a demo today.