What is an Independent Contractor?

Welcome to Training with LegalEase. Today, I would like to talk about independent contractors.

What is an independent contractor?

When should you, as an employer, enter into an agreement with a contractor versus hire an employee?

In March of 2024, the Department of Labor implemented a new six-factor test to help us determine whether a worker is an employee or a contractor. Many companies get in trouble because they have contractors conducting their business when those individuals really should be employees.

Let’s go over the six-factor test to discuss when a worker should be considered a contractor vs an employee. Here are the questions you should ask.

  • Does the worker have an opportunity for profit or loss? An independent contractor is someone who negotiates his/her rate and who has a chance to make a profit from the work vs an employee who works for your business.
  • Does the worker invest in his or her own equipment and facilities? An employee is someone who typically works in an office that is set up by the company, has a company computer, a company phone, and the employee performs the job assigned. However, a contractor will bring his or her own computer and phone, for example, to perform a specific project for the company.
  • How permanent is the relationship? An employee works indefinitely until the employee resigns or the company terminates the relationship. A contractor typically performs a specific project for a certain time period. If you have someone doing that (i.e., working a specific job), then the worker will be considered a contractor vs an employee.
  • What is the nature and degree of control? This is a big one. Are you, as the employer, controlling the worker? If you are controlling when the worker arrives to work, when the worker goes on break, when the worker leaves for work, what type of work the person does, and the quality of work, then you are exercising a level of control that an employer exercises over an employee versus a contractor. A person in this scenario is likely to be considered an employee.
  • How integrated is the worker’s project or responsibilities to the employer’s business? In other words, is the worker doing the typical work of the business like any other employee or is that worker working on a specific project? As an example, if I have a project that I need completed over a six-month period and I want to contract with someone to do the project, then that is different than hiring a worker to answer my phones. The person who is answering my phone is likely to be considered an employee vs a contractor.
  • What is the skill and initiative required? An employee may or may not have a specific skill, but a contractor typically performs a specific project with a specific skillset using his/her own equipment while exercising a certain level of control. A contractor will tell the employer when they can complete a job and will enter into a contract where they negotiate the terms – a contractor will tell you his/her rate of pay vs an employee who applies for a job that is already carved-out for him/her to do.

I hope this was helpful. The six-factor test can be daunting so it is important to have an employment lawyer, like myself, to conduct an audit to make sure your job descriptions are sufficient, make sure your contracts are sufficient, and review your classifications  to ensure that people are not misclassified as contractors when they should be classified as employees.

Thank you for joining Training with LegalEase. If you have any questions, please contact us. We will be happy to assist you with your classification questions.