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Independent Contractor vs. Employee

By
James Parker
/
July 10, 2022
Last reviewed by
Boruch Burnham, Esq.
/
March 26, 2023

In recent years, the job market has veered into uncharted territory. With the growth of the "gig economy," many workers increasingly handle minor tasks such as providing ridesharing through companies like Uber and Lyft, delivering food through services through DoorDash and Grubhub, and even providing grocery shopping services. 

There are advantages and disadvantages to being an employee or independent contractor. You typically have more stability in your employment, access to benefits, and regular income. Nonetheless, you often have less control over your work schedule and perhaps fewer options for the kinds of employment you can perform. As an independent contractor, you have more control over your work schedule and possibly more freedom over the kinds of work you can perform, but you also lack access to benefits and job security.

In this article, AAL will discuss some of the laws governing the distinctions between employees and independent contractors, why those distinctions matter, and what damages and compensation you may be entitled to if your employer has misclassified you as an independent contractor.

Disadvantages of being misclassified as an Independent Contractor

Because employees are entitled to significantly more rights and protections under state and federal laws and are much more expensive for employers, misclassifying workers as independent contractors to achieve significant cost savings at the expense of those who work for them has unfortunately become a common practice. 

Minimum wage and overtime compensation. Under the Fair Labor Standards Act (FLSA), employees must generally be paid a minimum wage (currently $7.25 per hour) and overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. 

Workers’ compensation benefits: Most employees must obtain workers’ compensation insurance covering each of their employees. Furthermore, in the case a worker is injured, even if the employer has workers’ compensation insurance, their policy may have deductibles, co-pays, and other out-of-pocket costs that are not covered--not to mention that the employer’s premiums may increase. While you may be able to sue the person you were working for as an independent contractor under certain conditions if you are injured while working for them, the damages you can be awarded if you win can be much less than those an employee will be entitled to.

Personal liability: One of the significant distinctions between an employee and an independent contractor is that in traditional employment relationships, the employer will be liable for damages caused by their employees when acting in the scope of their employment under the legal concept of “respondeat superior” which is a form of vicarious liability. Vicarious liability (also referred to as “imputed” liability) means that one person can be held responsible for the acts of another. That said, sometimes employees may be liable, such as in cases of intentional or reckless misconduct. 

By contrast, independent contractors will be liable for accidents and other claims arising from their work. Furthermore, in situations where liability insurance is required, independent contractors are responsible for procuring and maintaining their own coverage. It bears mentioning, however, that there are cases where both the employer and an independent contractor may be vicariously liable for a contractor’s work, such as where specific duties of care may not be delegated to another on grounds of public policy (for example, hospitals have a non-delegable duty to ensure that their patients receive adequate medical care, and therefore even if the hospital contracts with a third-party provider to provide medical services, the hospital is still responsible for ensuring that the patient receives the necessary care), or if the employer was negligent in hiring the contractor (for example, if the employer neglected to verify that the contractor had all the appropriate insurances or certifications to perform the task they were hired for)

Tax-related disadvantages: Under the Internal Revenue Code (IRC), independent contractors are responsible for paying both the employer and employee portion of Social Security and Medicare (FICA) taxes, which can add up to 15.3% of their income, in contrast to employees, who have these taxes automatically deducted from their paychecks, with their employer contributing an additional 7.65%. Furthermore, complying with tax laws is a lot more burdensome for independent contractors for a number of other reasons. 

Health insurance and unemployment benefits. Under the Affordable Care Act (ACA), employers with 50 or more full-time employees must provide health insurance coverage to their employees at the federal level, and states may have lower thresholds. While most private-sector employers are generally not required to provide unemployment benefits, these may be required under state law. On the other hand, independent contractors are generally not eligible for these benefits. 

How the law distinguishes between employees and independent contractors.  

An employer cannot simply avoid their obligations towards their employees by including clauses in their contracts defining them as independent contractors. Federal and state laws have various factors which will support one classification over the other, and will be used to ultimately determine which classification should apply to a given work arrangement. 

Factors that would support an employee classification include: 

  • The worker is subject to the direction and control of the hiring entity in terms of how they perform their job duties.
  • The employer provides the worker with training, tools, and equipment needed to perform their job.
  • The worker performs tasks that are integral to the core business of the employer.
  • The worker is required to work exclusively for the hiring entity and cannot provide services to other clients.
  • The worker is entitled to employee benefits such as health insurance, retirement plans, and paid time off.
  • The worker is paid a regular salary or hourly wage, as opposed to a flat fee or commission-based payment.
  • The worker does not have a significant financial investment in their work, such as owning their own equipment or office space.
  • The employer has the right to terminate the worker's employment at any time without cause.

Conversely, factors that will tend to support an independent contractor include: 

  • The worker has control over how they perform their job duties and can determine the methods and tools used to complete the work.
  • The worker is free to work for other clients and is not restricted to working exclusively for the employer.
  • The worker is not entitled to employee benefits, such as health insurance or retirement plans.
  • The worker is paid a flat fee or commission-based payment rather than a regular salary or hourly wage.
  • The worker has a significant financial investment in their work, such as owning their own equipment or office space.
  • The worker is responsible for paying their own taxes and providing their own insurance coverage.
  • The worker is not subject to the direction and control of the hiring entity except in terms of the end result of the work.
  • The employer does not have the right to terminate the worker's employment without cause, as the worker is engaged in a contractual relationship rather than an employment relationship.

You may be entitled to compensation and damages if you have been misclassified by an employer

If you have been misclassified as an independent contractor, you may be entitled to various forms of compensation, including: 

  • Back wages and overtime
  • Reimbursement of expenses 
  • Unemployment benefits 
  • Workers’ compensation benefits 
  • Penalties

A skilled attorney with extensive Employment Law experience can zealously advocate on your behalf in order to get you the best possible outcome for your case and achieve justice for the losses that you have suffered. Using their legal expertise and trial tactics, and by employing expert witnesses as necessary, your attorney will be able to gather evidence of your misclassification and present that information in the most compelling way for your case.

Through AAL, you can find a number of experienced and dedicated attorneys who can help you seek the justice you deserve.

 

*Disclaimer: Attorney At Law does not represent all lawyers in all states. There may be differences of opinion. It’s always advisable to consult with an attorney when in a legal situation.

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