Definition of Contractor
A contractor is a self-employed individual. The contractor’s client (or the payer) has the right to control and direct only the result of the work — not what will be done, how it will be done, or where it will be done.
What is a contractor?
A contractor is an individual who is responsible for:
- Setting their own hours, which are likely to flex from day-to-day
- Being in control of where they will do their work, whether it be in a formal office setting, a coffee shop, or somewhere else, as long as they can accomplish their goals
- Determining which projects they will and won’t accept
- Deciding how they will best accomplish their projects
- Paying their own taxes, including their portion of employment taxes such as FICA
Each of these requirements must be met for someone to be classified as a contractor versus an employee. Meeting some of the requirements, but not all of them does not meet the DOL (Department of Labor) and IRS tests for a contractor classification.
Why is contractor an important term for me to know for my business?
Knowing the difference between an employee and a contractor is not just important for your business, but it is imperative. Misclassifying an employee as a contractor under the FLSA (Fair Labor Standards Act) will result in a minimum of:
- Significant fines from both the DOL and the IRS
- Potential backpay estimated by the employee
- Required back tax payments plus penalties
- An audit of like-positions, which can quickly expand in scope
- A multi-year probationary period during which the DOL will conduct surprise site visits and audits
Some businesses mistakenly think hiring contractors rather than full-time employees is a way to cut costs and save on benefits and employee taxes. In a “gig economy,” it is critical to your business’s well-being to create your contract positions as they are defined.
What is the history of the term contractor?
The origins of how independent contractor has been defined are somewhat complicated. Multiple agencies have been, and continue to be, involved in how the term is specified. A high-level look at how contractors have been defined follows:
- In 1867, the House of Representatives created a committee devoted to labor. This was the first Federal recognition of labor’s importance. Still, it was short-lived and lost attention when the champion, William Sylvis, died.
- Between 1869–1883 12 states formed their own Bureaus of Labor and Statistics to provide oversight of working conditions. These were driven mainly by the working unions of the time.
- The Federal Department of Commerce and Labor was created in 1903 and, among other things, was to govern how employers treated employees in relation to their pay, working conditions, etc.
- Because of the concern certain members of Congress had about the potential conflict of interest between Labor and Commerce, the two were divided into individual Cabinet positions in 1913.
- The 1099 form was created in 1917 to capture various tax-eligible earnings companies had not paid for legitimate reasons.
- Starting in 1929, the National Labor Relations Board (NLRB) decided to detail how employers should treat what they defined as employees.
- In 1935 the National Labor Relations Act (NLRA) was passed — more widely known as the Wagner Act. The government sympathized with the plight of the workers, and the standards unions were working to enforce. As a result of their exclusion from coverage eligibility by the Act, the definition of independent contractors was included in the legislation.
- Even though Labor and Commerce were now managed under the purview of separate Cabinets, both had (and continue to have) oversight about how “contractors” are defined.
As work environments continue to change, so do the definitions associated with various positions companies hire.
Other terms similar to contractor that can help you
- Department of Labor (DOL): The department, whether federal or state, that oversees companies’ adherence to labor laws.
- Employment laws: The federal, state, and local laws that specify the responsibilities of employers and the rights of employees.
- Self-employed individual: Someone who does not work for a specific employer responsible for paying them a consistent salary or wage. Also referred to as independent contractors, they earn their income by entering a contractual agreement with a business and are responsible for their own income tax tracking and payment.
- Independent contractor or employee: determining which one to hire for the job
- A checklist for creating an independent contractor policy
Summary of the definition of contractor
A contractor is a position that companies hire to complete projects that are not part of the ongoing business processes. Anyone involved in this type of work determines when, how, and where they will accomplish the agreed-upon tasks.
Similar glossary definitions you should know
- Gig workers: Contingent workers, such as independent contractors and freelancers, who typically perform temporary work for multiple clients.
- Workplace flexibility: “A mutually beneficial arrangement between employees and employers in which both parties agree on when, where, and how the employee will work to meet the organization’s needs.”
- Business necessity: When an employer makes an employment-related decision that disproportionately impacts a particular group but is based on business needs. The employer must be able to prove that the action taken is job-related and consistent with business necessity