When Can I Classify a Worker as an Independent Contractor?

By MBO Partners | June 2, 2021

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The workforce consists of a variety of workers including full-time employees, temporary workers who may fill seasonal or short-term needs, and contingent workers such as freelancers, independent contractors, or consultants. This diversity of workers gives businesses many benefits including workforce flexibility, access to certain skills on-demand, and the ability to form ready-made teams when a project need arises. However, it is very important that employers correctly classify their workers in order to comply with local, state, and federal laws.

One of the biggest classification questions in play today is how to differentiate independent contractors from employees. There are many different laws, tests, and guidance documents that govern whether a worker should be classified as an employee or an independent contractor and these nuances can quickly become confusing, and sometimes even contradictory, for businesses.

When engaging independent talent, enterprise managers should have a general awareness of the differences between independent contractors and employees in order to remain compliant and minimize the risk of misclassification.

1. Understand Degree of Control

Employees work for a single employer that has say over how they do their work and what work they do. For example, a manager has a certain degree of control over the hours, location, and type of work an employee is responsible for. With independent contractors, it is important to be highly aware of this degree of control.

Independent contractors are their own business entity and can choose when, where, and how they complete the work they are contracted for. Aside from behavioral control—dictating how and when work is done—employers must also be aware of financial control. Unlike employees, it is common for independent contractors to be reimbursed for certain expenses the incur for their project work. Independent contractors also tend to be paid a flat fee for their work rather than a regular wage in exchange for working a certain period of time, like an employee.

2. Define Your Project in Detail

As a general rule of thumb, it is best to engage independent contractors for defined projects and hire an employee for an ongoing business needs. A project is something that has a specific start and end date, defined success metrics, and agreed-upon deliverables. An ongoing business need focuses on the core goals of your business.

If employees are already performing the same work you want to engage an independent contractor to do, this is a red flag. In the majority of cases, independent contractors should be providing skills or experience that is not a core part of your business.

3. Require a Specialized Set of Skills Outside Your Business Area of Expertise

Independent contractors are experts in their field of work and have built their business around their skillset. When deciding whether to engage independent talent or hire an employee, consider whether the work you need done requires a specialized set of skills. If your project is more generalized work that existing employees have the skills to complete, the work should be assigned to an internal employee or a new hire if your workforce is at capacity.

Keep in mind that independent contractors are generally responsible for providing any tools are materials they need to complete their work and they should not require additional training to start a project. When hiring an employee, on the other hand, it is expected that they will receive some sort of training for their job and are given a place and tools to do their work.

If you have more questions about determining worker classification, our team of experts is here to help.

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.

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