Advances in technology have spawned an explosion of freelance workers and the birth of what is known as the gig economy and gig workers. This economy features independent contractors who provide services based on short-term contracts and projects instead of permanent jobs. These jobs offer flexibility and variety but don’t provide the benefits and security a full-time position with a company typically offers.
An independent contractor is a freelance worker who contracts to provide services to a client or business for payment. The contractor works independently and uses his or her resources and equipment to complete the work. Some examples of people who do this type of work are photographers, private investigators, website designers, editors, house cleaners, and dog walkers.
The laws regarding independent contractors center on how the workers’ employment status is classified. Are they self-employed independent contractors, or are they full-time employees? Under state and federal law, this classification of employee or independent contractor has tax and benefit implications.
Businesses classify workers as independent contractors for several reasons, including that:
An employer’s relationship with an independent contractor lacks the formality of an employer/employee relationship and can be ended much more quickly. If a company incorrectly classifies workers as independent contractors instead of employees, they can be forced to pay fines and penalties and perhaps have to repay employment taxes.
Independent contractors have certain rights under federal and state laws and regulations. It’s essential for a contractor to be aware of the relevant laws to ensure that he or she will not be taken advantage of.
A legal contract is the place to start to protect an independent contractor’s rights. An independent contractor agreement should clearly state how much and when the contractor will be paid. The contract should also expressly state that the person is an independent contractor, not an employee. It should also clearly establish that the relationship between the independent contractor and the client is project-oriented. Without this characterization, the relevant federal and state agencies might consider the person as an employee.
Make sure the agreement sets out the details of the project, including:
Remember that you are not an employee who follows orders. You don’t need to be trained, as you already have the skills to do the work. You are working for a client, not a boss, which is a different dynamic.
As an independent contractor, you control how the project gets done. You don’t have to conform to traditional office hours or break times regulated by state and federal laws. You can work where and when you want. You’re the boss.
To maintain this distinction, it’s often best not to work at the client’s office. A contractor should also use his or her own resources, such as computer equipment and supplies. Marketing yourself as an independent contractor online and in job forums will also help to display your status to a potential employer or client.
The contract with the client should state how much the contractor will be paid, how the contractor will be paid, and the date or dates on which he or she will be paid. Most independent contractors submit invoices listing the work performed and what the client owes. If the client fails or refuses to pay for services rendered, the contractor has the right to sue for breach of contract.
Also keep the option open to work with another independent contractor to complete a project. Include in your contract an opportunity to partner with or outsource a project to another independent contractor if the need should arise.
The contract may state that a person is an independent contractor, but the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) might determine otherwise. If they decide that you are, instead, an employee of a company, you have the right to challenge the designation.
The IRS and DOL set forth the federal independent contractor regulations.
The IRS classifies someone as an independent contractor or an employee based on several factors, including:
The DOL classifies whether someone is an independent contractor or an employee regarding benefits and labor rules. They use different criteria than the IRS that include:
Even if a worker is not considered an employee under federal law, he or she still could be regarded as one under state law. Some states use a standard similar to that of the IRS in determining if a worker is an employee. Others use something called an ABC test, which is considered to be more restrictive than the IRS test. This test says that a worker is an employee unless the following three criteria are met:
Independent contractor rules and regulations vary from state to state. Contractors in California, for example, should be especially mindful of the state unemployment insurance code, wage order claims, and the rules put forth by the Department of Industrial Relations.
The federal agencies and states might have different factors for determining an independent contractor depending on the situation. Therefore, it is not unusual for someone to be designated an independent contractor under the Fair Labor Standards Act but to be classified as an employee under the relevant tax law.
When the federal and state laws conflict, the law that applies a stricter standard for designating independent contractors applies. This standard helps to ensure that workers’ rights are protected.
The classification of independent contractors is a dynamic area of the law. Modern technology, ride-sharing services, and the Covid-19 pandemic have resulted in a surge of people working remotely or independently. New laws and regulations have, therefore, been implemented to deal with these changes.