Key Differences To Consider When Working With Employees vs. Contractors

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It is important to understand how to source both employees and independent contractors so you can leverage the ideal type of worker depending on the needs of your business. Unsurprisingly, many businesses utilize both types of workers. In this post, we discuss some differences to keep in mind between contractors and employees when developing your labor strategy.

Employee vs. independent contractor defined 

While this is a complex legal issue that depends on several different considerations and should be addressed with your favorite employment counsel, at the most basic level, an employee receives a Form W-2 from your company. That’s why some people refer to them as “W-2 employees.” An independent contractor receives a Form 1099-MISC or 1099-NEC from your company if the threshold for the number of services paid is met. You may hear them referred to as “1099 contractors.” Typically, businesses have more behavioral control over their employees and have very limited control over independent contractors. The IRS has put forth a lot of helpful guidance on the matter as it relates to federal taxes, which is important to review. You should note that individual states, and even certain cities and administrative agencies within those states, may also have their own standards/tests for determining whether someone is an employee or independent contractor.

The table below contains a few of the common differences between employees and contractors:

Employee	Independent Contractor
Receives a Form W-2 from the employer.	Receives a Form 1099-MISC if required under law.
The Employer is responsible for withholding taxes and sending them to state and federal taxation agencies.	The independent contractor is responsible for all taxes.
The employer pays for Workers’ Compensation coverage and may pay for other benefits, including health insurance.	The independent contractor is responsible for obtaining insurance and other benefits.
The employer can schedule an employee to work whenever the employer wants – e.g., 15-hour days every weekend.	Independent contractors can choose when and where they accept jobs.
Employees often have a regularly expected income though, e.g., a salary or ‘full-time’ work.	Independent contractors have more control over when they’re willing to work and how many hours they’re willing to work but have limited if any expectations of a set amount of income.

As mentioned earlier, worker classification can also be subject to interpretation at the state level. For example, currently, New Jersey, Massachusetts, and California have different and generally more restrictive definitions of what it means to be an independent contractor. In some instances, workers in these states must meet what is known as the “ABC Test” to be classified as a contractor; so if you are receiving services from workers in one of those three states it would be beneficial to familiarize yourself with the applicable requirements and again, seek legal counsel. 

When it comes to worker classification, businesses cannot unilaterally decide if an individual is an employee or contractor based on their own desires or business needs. Typically, the agreement between the parties and the nature of an individual’s work and your business relationship with them will help determine their classification.

Sourcing and hiring employees

Roles often filled by employees will require substantial interviewing, onboarding, and/or training, and will have a regular schedule until either employer or employee terminates the relationship or the employment agreement dictates otherwise. The roles would also include management providing oversight and direction about how the work should be performed. 

As an example, let’s look at a coffee shop. The frontline roles at a coffee shop, like a barista and retail clerk, usually fall under the “employee” classification. A barista may be scheduled to work full or part-time, but they generally expect to continue working in the same role and completing whatever tasks are assigned by their manager. Their schedule is set by their manager, not by themselves, and they must show up on time to the coffee shop whenever they’re assigned to work. When they are performing their job, they must follow the expectations and instructions set out by their manager, which typically includes details on exactly what to say to customers, how to make each drink, what ingredients to use, and what policies they must follow. 

To hire an employee, the first step is generally to post the open role on your company website and online job boards. You must create a clear description of the job duties and expected qualifications. Then you have to filter through all of the applications you receive and schedule interviews with qualified applicants. After interviewing multiple applicants, sometimes by multiple people within your department or organization, the decision is made as to who the business wants to hire. Then there is the onboarding paperwork that comes with hiring an employee, including a Form W-4, I-9, providing the employee handbook and related policies, and possibly enrolling the employee in the company health insurance plan. On your end, there may also be work to add the new employee to any relevant insurance policies and complete health insurance enrollment. Next up is procuring any goods needed for the employee to do their job. This may include a laptop and new company accounts, a uniform, a nametag, a desk set up, specialized tools, and more. Finally, someone must train the new employee on anything they need to learn to complete their job successfully at your company. As you can see, there is a high time investment and cost to hiring a new employee, no matter what type of business you are engaged in. 

Sourcing and engaging independent contractors 

Typically, jobs filled by independent contractors are for a defined period of time and are self-directed, meaning the contractor determines how the work gets done. 

Going back to our coffee shop example, there are a few services that independent contractors may perform for this type of business.  For example, the shop may be holding a big event for a new drink that is launching. The owner hires three independent contractors to work this event. The contractors work for three days only — one day to set up for the event, one day to coordinate the event, and one day to break down the event. They may perform a variety of tasks during the event, such as moving materials, setting up tables, managing the line of customers, and other event-related tasks. None of the tasks require intensive training and the contractors know how to set up/take down events. The coffee shop most likely paid a flat fee for the contractors to work all three days of the event. 

To engage an independent contractor, businesses may go through some steps noticeably different from the processes for hiring an employee. First, to source workers, you may post the job online, but you may also proactively look at sites where contractors post to advertise their services. Once you have identified possible contractors, you may speak to them, but the focus is not on their long-term fit with the company, but rather on their expertise, work samples, and ability to complete the specific project in mind. When engaging an independent contractor, usually both the business and the contractor agree to a contract outlining the project, payment details, and the relationship between the two parties. The contractor may usually fill out a Form W-9, but no other onboarding documents or paperwork is typically needed. Then the contractor may begin work immediately to provide the deliverables by any agreed-upon deadline. Businesses usually won’t be training them or offering detailed guidance like you would for an employee. 

As you can see, sourcing independent contractors looks different than the process for an employee. It’s important to know how to do both as your business grows and the need for one over the other becomes more defined. That way you can efficiently and effectively find the best worker possible for your business.

Worker classification in the future

Looking forward, it is possible the COVID-19 pandemic and subsequent economic downturn will impact laws surrounding worker classification. Specifically, there may be less support for states to enact narrower definitions of what it means to be an independent contractor as workers and businesses alike look to fill more temporary jobs and seek flexibility. However, some may support the opposite viewpoint: that now more than ever it is time to enact narrower definitions that classify more workers as employees given the surge in gig work. It remains to be seen how this plays out.

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