In a labor market that’s become more complex, employers could have as many as six or seven classifications of workers onboard at any given time. Working alongside full-time, part-time and temporary workers are seasonal and contingent workers.
By hiring different types of workers, organizations can adjust their staffing needs according to economic fluctuations and peak productivity times. But they also must understand the differences between workers and be able to correctly classify their types of employment to avoid violating the law.
Worker classifications determine, among other criteria, which workers are entitled to overtime pay and benefits, how workers are managed, compensated, and taxed, and whether certain classifications are protected under the law. While this guide follows federal worker classification standards, wage and hour divisions in state labor departments’ might further stipulate how worker classifications are determined. Therefore, employers also must understand their obligations under their states’ labor laws.
How to Use This Guide
This guide divides workers into two broad categories: “employees” and “contingent workers” and lists their subcategories (e.g., full- and part-time for employees and independent contractors or freelancers for contingent workers), which laws, if any, apply, and how to classify each worker group.
Employees and contingent workers are hired and paid for their skills and expertise. However, employees are different from contingent workers in three key ways: employees are on an employer’s payroll as permanent staff members, the law protects their rights and pay, and they have access to benefits and perquisites. Also, employers must withhold income taxes from employees’ wages, pay unemployment taxes on their earnings, and withhold and pay Social Security and Medicare taxes.
Employers basically hire contingent workers as needed. The workers don’t have the protection of labor and employment laws or access to employee benefits. However, employers that misclassify either group can be legally penalized. To distinguish employees from contingent workers and their status under the tax code, the guide references the U.S. Department of Labor (DOL) and IRS’s definitions of workers.
Types of Employees
These employees normally work a 30- to 40-hour week or 130 hours in a calendar month by IRS standards. The Fair Labor Standards Act (FLSA) doesn’t define full- or part-time employees, leaving employers to come up with their own definition. However, an employer with 50 or more full-time employees (FTEs) is considered an Applicable Large Employer (ALE), who must offer affordable health care coverage to FTEs and their dependents under the Affordable Care Act or pay the IRS what it calls a “shared responsibility payment.”
Employees who work fewer than 30 hours a week are employed part-time. They typically don’t qualify for benefits, although some employers are doing so to attract and retain workers. However, employers must pay the same taxes for employing them as if they worked full time.
Employees might hire these workers for a set length of time or for a specific task or project. Employers that hire and pay them directly, as opposed to going through an agency, must withhold taxes from their wages or pay a penalty. Temporary employees are entitled to unemployment and Social Security benefits.
These employees are hired during peak seasons, such as holidays or summer months. Some are non-immigrant, H-2B visa holders. Employers must make sure they complete the appropriate labor certification documents and meet other DOL requirements when requesting visas for workers. Also, like temporary employees, seasonal workers are entitled to unemployment and Social Security benefits.
Types of Contingent Workers
Types of Independent Contractors
This subcategory is one of four basic subcategories contingent workers use to describe themselves. The names are usually interchangeable. Some workers are bound by a written contract. The IRS defines independent contractors as people who offer their services to the general public in an independent trade, business or profession. Contingent workers are subject to the Self-Employment Tax if they earn $400 or more during a tax year.
The term is interchangeable with the other subcategories. However, creative contingent workers, such as artists, writers and photographers, often use “freelance” to describe their work.
Contingent workers are sometimes referred to as “casual” or “temporary” workers, which, again, describes a non permanent relationship with an employer.
This subcategory of contingent workers often determines client’s needs and gives then expert advice, but doesn’t perform the work; whereas, contingent workers might give clients advice, but they also do the work.
Classifying employees vs. contingent workers
The IRS uses a 20-point classification system for classifying employees based on three criteria:
- Behavioral: The employer or business owner controls or has the right to control what workers do and how they perform their jobs.
- Financial: The employer or business owner controls aspects of the workers’ jobs, such as how they’re paid, if they’re reimbursed for expenses and who provides the workers’ tools and supplies.
- Type of Relationship: The work performed is key to the business, there’s a written contract between worker and employer, and the employer provides a pension, vacation pay, insurance and other employee-type benefits.
The FLSA has a 6-point list of conditions similar to the IRS’s system for classifying workers:
- Workers are employees if the work they perform is essential to the business.
- Workers are probably employees if their managerial skills present profit-or-loss opportunities for the business.
- Workers are likely contingent if they invest in the employer’s equipment and facilities.
- Workers could either be employees or contingent workers if special abilities are required to perform the work.
- Workers are likely employees if their relationship with the employer is or seems permanent.
- Workers are likely employees if the employer has or retains control over them.
Compliance and emerging changes
Some of the differences between employees and contingent workers remain somewhat unclear. But making an effort to classify both correctly based on the IRS and FLSA’s criteria is a good business practice that can minimize employers’ risk for penalties. Again, this guide follows federal standards, and wage and hour divisions in state labor departments’ may affect how workers are classified. For instance, California recently passed legislation that enacted the new ABC contractor law.
Contingent workers are predicted to outnumber employees, possibly by 2030. This fast-growing segment of the workforce is gaining appeal among Millennials and the Gen Z generations. Older workers are reportedly driving the “gig” economy, which contingency workers have fueled. Also, more employers plan to hire contingent workers for the skills needed in the current tight labor market.
Finally, members of Congress, in a bipartisan effort, are considering amending labor and employment laws to protect contingent workers’ rights and pay, and to allow them access to benefits.