Independent Contractor or Employee?

Mariana Villa da Costa – Littler Mendelson

There are many situations when companies consider hiring “independent contractors” rather than direct employees.  When considering such a step in an overseas market, each country’s labor law should be consulted to determine the specific requirements of independent contractors in that country.  Here are some issues to consider that are commonly addressed by most country labor laws.

Independent Contractor or Employee?
The difference between an employee and an independent contractor is determined based on the requirements that one must have to be an employee.  While each country is different, generally, an individual will be considered an independent contractor and, therefore, will not be covered by the labor legislation, if he or she has independence to perform the work and it is not subordinate to a company’s directives and regulations, and when there is no exclusivity in the relationship between the parties.

5 Questions to Assess Independent Contractor Status

Here are 5 questions to help you determine if a relationship is a true independent contractor:

  1. A worker is an employee if the company has the right to control the manner and means of accomplishing the result desired.
  2. An employee is paid for his/her time and bears no risk of wage loss if the employer’s product is unprofitable.  An independent contractor has the opportunity to profit from the project and the risk of loss, depending on the worker’s managerial skill.
  3. An employee is not required to invest in the employer’s business.  An independent contractor makes some investment in tools, equipment, supplies, and facilities appropriate for his/her business.
  4. An employee may receive training.  An independent contractor has the skills necessary to perform the task without additional training.
  5. An employee enjoys a continuing relationship with the employer.  An independent contractor generally works on one project and moves on, accepting additional projects when and if available.

Key Considerations for Independent Contractors

Before engaging an independent contractor, be sure to consider the following:

  1. Determine the real need to have an independent contractor.  Could this work be done by an employee instead?
  2. Draft an independent contractor agreement that makes the case for real independence. Prepare a very clear and specific agreement.  Address all possible issues and avoid having the contractor sign non-compete restrictions.  Avoid mention of bonuses or other provisions, such as  vacation, work hours and other stipulations that look like employment terms, in the independent contractor agreement.
  3. Structure the day-to-day working relationship to support the contractor’s independence. For example:
    1. Do not put the contractor in the employment list or in the payroll and keep the contractor off organization charts.
    2. Do not provide an office or company business cards and do not schedule hours.
    3. Avoid constant email with requests that are more closely to control than simply guidelines on how the company wants a final product to be delivered.
    4. Do not pay the same amount every month.
    5. Ask the contractor to invoice the company with detailed information on hours worked and project deliverables to justify payment.

Additional Tests to Assess Independent Contractor Status

This checklist is based on the one developed by the US Internal Revenue Service (IRS).  It gives valuable information that characterizes most independent contractor relationships across the globe:

  • No instructions
  • No training
  • Services do not have to be rendered personally
  • Set own work hours
  • Not a continuing relationship
  • Control their assistants
  • No interim reports
  • Paid by job
  • Time to pursue other work
  • Decide on job location
  • Order of work set
  • Work for multiple companies
  • Pay business expenses
  • Have own tools or equipment
  • Significant investment in their business
  • Offer services to general public
  • Can make entrepreneurial profit or loss
  • Cannot be fired at will
  • No compensation for non-completion

Maintaining the proper classification of employees versus contractors is very important to ensure compliance with labor law regulations.  The rules are unique to each country, and HR professionals are urged to review the specific requirements for each country as needed.

Important Note: These guidelines are intended to provide a brief overview of the independent contractor issues in foreign countries.  It is not intended as a substitute for professional legal advice and counsel.

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7 responses to “Independent Contractor or Employee?

  1. Kudos for a very well written article on a issue that remains much more prevalent than business and industry is willing to acknowledge.

    My observation is that often there is a great deal of misunderstanding among employers as to when someone really can be classified as an independent contract. Your guidance provides a very user-friendly checklist which , if followed, can save employers from significant fines and disruptions to their business.

    In the last year I have worked on 3 separate independent contractor status cases wherein the employers were knowingly attempting to conceal very clear evidence that the workers they had classified as “1099 employees” could not satisfy most of the threshhold tests. I continue to be amazed at the lengths to which some organizations will go to save (when compared to the costs of being caught) relatively small amount of money (payroll taxes OT, etc.).

    • marianavcosta

      Hi Dave,
      Thank you so much! I am glad you enjoyed the article. It is a highly debatable topic and I think information is crucial for people to understand the differences and stop making misclassifications.
      I have seen companies having to pay millions of dollars on lawsuits for hiring an individual as IC when truly they were hiring an employee!
      Please keep coming back to our blog! We love our readers.
      Regards, Mariana

  2. Damian Zimmerman

    Great summary. One additional factor-not included in your list – may be significant in determining whether someone is an independent contractor as opposed to an employee. The very nature of the work itself. Many legal systems consider a worker hired to carry out hazardous or particularly dangerous work an “employee” as opposed to an independent contractor even where all of your other independent contractor factors are present. This is generally designed to prevent an employer from disclaiming liability where they have prior knowledge that certain work – such as using explosives in construction or the moving of hazardous chemicals – create significant potential harm to the public.

    • marianavcosta

      Hi Damien! Thank you for your comment and I am so glad you enjoyed the article!
      That is a great additonal you made. The real nature of the work performed can be a strong factor to determine the condition of being an employee and not an IC.
      We must take, truly, a great care when dealing with those situations as they may be costly and problematic to the companies! Keep reading our blog! Regards, Mariana

  3. Concur, this is good advice. In Australia, many organisations believe that they are hiring a contractor when, in fact, the engagement conditions are those that define an employee/employer relationship. Just because you call it an independent contract doesn’t make it so. Levels of direction, control, supervision, providing own tools and transport, freedom to work own hours, OH&S egislation cover, providing less than 80% of income from one client and not being the party who makes the payroll payment (“deeming law”) will all be determining factors most international firms are not aware of.

    By Steve Lancaster Director, Chill IT Pty Ltd

  4. Paul Strange

    This is good advice. In West Europe, the advice given in this article is standard practice. Most contractors or interim managers are self-employed, and there is an active job market. Many organisations are employing contractors as flexible HR, and I think this type of employment will be popular after this recession is over.

    Paul Strange – STR HR

  5. Great information. I’m struggling with a case in the Canadian trucking industry where Carriers—the holder of a NSC (National Safety Code) designation, use Lease Operators who are effectively sub-contractors, but operate under the same NSC, parent company driver logs, weekly trip sheets etc.

    Employees of Lease Operators are paid by the Lease Operator and therefore have no recourse against the Parent company holding the NSC even though the Parent Company is responsible for up-keeping the National Safety Code regulations designed to represent public safety policies.

    The issue of employee vs sub contractor goes one level deeper here and further muddies the waters.

    Very useful post…