Employees and Independent Contractors: How They Differ

In the wake of COVID-19, the term independent contractor has become a buzzword.

So, what’s all the “buzz” about independent contractors, and what sets those in the gig economy apart from employees?

As the independent contractor field is on the rise, it’s vital that both employers and independent contractors know the difference. Companies need to be wary of entering a contract with an independent contractor without vital accountability in place. Areas like taxes, contracts, and the overall working expectations need to be properly covered to best protect both parties. Before jumping in the deep end of the independent contracting world, it’s important to outline the difference between them and employees.

Independent contractors vs. employees

At first glance, independent contractors and employees appear the same on paper. They both work for a company by carrying out specific duties. Both independent contractors and employees receive payment and both are usually operating within the capacity of a team. There are several areas, though, that are wildly different.

Meet the independent contractor:

• Self-employed and responsible for withholding their own taxes via a 1099 form
• Companies cannot mandate them to adhere to specific company policies (i.e. dress codes, rules of conduct, etc.)
• Not eligible for company employee packages such as health or dental insurance
• Should provide their client with a contract outlining the working agreement (i.e. project duration, job responsibilities, etc.)
• Experts in their field. Independent contractors are usually self-starters and do not need to be in a highly collaborative position in order to work behind the scenes and complete projects

Meet the employee:

• Provided with a W2 tax form by the company and are responsible for how they choose to file their taxes
• Held responsible for following company guidelines closely; risk termination if they do not abide by the employee handbook
• Given the choice to enroll in employee health and dental benefit packages
• Employers provide them with agreements to sign such as liability clauses, workers’ compensation information, and payroll agreements
• Can be a better option if the work is long term and ongoing, central to what your business does, and highly collaborative

Which is best?

Both time and the overhead of the hiring process are going to be the determining factor when deciding if the independent contractor route is the best.

Now that you’ve read an outline of the main differences, you may be wondering which best meets your company’s needs. If you are viewing things from a Human Resources perspective, then costs associated with health insurance benefits, training, liability insurance, and the lease of a building or office space probably come to mind quickly. Both time and the overhead of the hiring process are going to be the determining factor when deciding if the independent contractor route is the best.

Count the costs

Many companies have transitioned to hiring independent contractors because it saves them time and money. For example, the training process alone can take months for some positions. This is not to say that training doesn’t take place for independent contractors — companies can greatly value the position and still train those that are up for the task. However, virtual training saves companies the cost of renting out a conference room, materials, having multiple employees to facilitate the training, and any snacks or lunch provided to trainees.

Time is money

Is your company really going to save that much money opting for independent contractors? That’s really up to your budget and the scope of responsibilities assigned to the vacant positions you’re eager to fill. In some cases, hiring 5 independent contractors that could be completed by 1 employee isn’t cost-effective. Suppose you need a project completed within 2 months rather than the 8 months that were projected. Hiring several independent contractors and delegating different aspects of the project to them would speed the project up and help you meet your deadline.

Is your company really going to save that much money opting for independent contractors? That’s really up to your budget and the scope of responsibilities assigned to the vacant positions you’re eager to fill.

Wrapping up

In a nutshell, independent contractors and employees vary in 4 ways:

1. Tax classification
2. “Workplace” expectations
3. Benefits
4. Working agreements

Both independent contractors and employees should have a clear understanding of their roles and the expectations that you hold them to.

Before you commit to one over the other, keep in mind that the legality of any agreement is entirely up to your company. Both independent contractors and employees should have a clear understanding of their roles and the expectations that you hold them to. It’s common for companies to use a hybrid of traditional employees and independent contractors. Assess the terms and conditions of each project and fairly outline the agreements that you make with independent contractors. Although the parameters are different, independent contractors must be viewed as an integral part of your company’s success because at the end of their day — they are!