What Are The Key Differences Between Employees vs. Contractors

Since the genesis of the gig economy, the debate about the distinctions between employees and contractors has accelerated. The key differences are only getting more complex as the global talent marketplace evolves. From a compliance and legal standpoint, it is crucial to understand these distinctions in order to make the right determination for your workforce. But there are other factors to consider as well, such as autonomy and career trajectory. In this article, we will explore the key differences between employees vs contractors and help you decide how to make your options benefit your business.

Employees vs Contractors – Compliance and Legal Determination

The first and most important difference between employees and contractors is in compliance and legal determination. Fundamentally, “employee” and “independent contractor” are worker classifications with legal definitions.

The IRS states that worker classification matters because “it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Businesses normally do not have to withhold or pay any taxes on payments to independent contractors.” 

Employees are covered by a variety of laws, such as the Fair Labor Standards Act (FLSA), which sets forth minimum wage and overtime rules. But as of now, contractors, on the other hand, are not exactly subject to these same laws.

The legal definitions of “employee” and “contractor”

The IRS defines an employee as follows: “Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”

The IRS defines a contractor as follows: “[People] who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

We’re seeing that these legal definitions may or may not be keeping up with what’s actually happening in this rapidly transforming global talent marketplace. As of the beginning of 2022, the NLBR may revise the definition of independent contractor. To learn more, check out our article What is Worker Classification and Why Does it Matter.

Employees vs Contractors – Amount of Autonomy

Another key difference between employees and contractors is the amount of autonomy. The level of autonomy a worker has is one part of the ABC test, a three-part test currently used in parts of America for determining if a worker can be classified as an independent contractor.

However, autonomy goes beyond just the ABC test. There’s a different level of supervision required for work done by employees vs contractors. Employees are generally given more assignments with less freedom to determine how the work gets done. Employees also tend to have set schedules and may be micromanaged.

Contractors, on the other hand, have much more freedom to determine their own work methods and schedules. Contractors are also able to work with multiple clients simultaneously.

Employees vs Contractors – Career Trajectory

Finally, employees and contractors often have different career trajectories. Employees typically have a more linear path, moving up the ladder within their company. Contractors, on the other hand, may move from project to project or client to client, depending on their area of expertise. This can give contractors a more varied and flexible career, but it also means that they may have to hustle more to find new work.

Career trajectory has really evolved with the dawn of talent marketplaces like Upwork, Toptal, and We Are Rosie. These platforms provide workers with a way easily find work that matches their skills and interests. And since many platforms are global, workers can find gigs from anywhere in the world. So while employees may be the ones “climbing the corporate ladder” in a traditional sense, contractors may have more opportunities to find work that they love and build a career around it.

Conclusion – Which Is Right For Your Business?

So which is right for your business? It depends on a variety of factors, from the type of work you need to be done to your company’s budget. However, you cannot simply decide which classification you want to use. These are legal determinations with legal definitions. While it’s impossible to know for certain which you should hire without consulting an expert, we recommend reading our article When Should You Hire A Contractor vs Employee.

If you misclassify workers by calling them independent contractors but they really act like employees in practice, then you can get into trouble because the IRS will not allow employers to evade taxes using such tactics. 

When you hire using GreenLight’s easy-to-use platform, we take care of worker classification using the world’s first AI-driven classification engine. All you have to do is find the right person, and we make sure they have a great HR experience while you stay compliant. Schedule a free demo today.

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Alex Steeno

Alex Steeno

Senior industry analyst, adviser of multiple hypergrowth agencies, SaaS, and tech-enabled service platforms, Alex Steeno regularly contributes insights related to industry trends, growth marketing, and management consulting.

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