Why does this matter?
You get paid either way, right? Well, sort of.
When you’re an employee, you get paid, but your employer also essentially takes care of social security, Medicare, and unemployment taxes. You get benefits, you get insurance, and you might even get a 401k plan. It’s a far more costly relationship for the employer, and estimates have shown that hiring an employee at a salary of $60,000 can actually cost the employer upwards of $75,000.
However, when you’re an independent contractor, you receive none of these benefits. The employer has the additional advantage of not having to pay employment taxes, pay overtime wages, or open themselves to liability for acts of the employee.
So it’s no wonder that companies, startups included, often want to shoehorn workers into the independent contractor category. In fact, there is a common contract provision that makes explicit that the relationship is merely one of a company and independent contractor.
However, that provision has been shown to mean very little as to what relationship is actually formed. Many see this as counter-intuitive to the entire purpose of contracts, but it is a method of protecting workers who would otherwise sign their rights away.
What actually matters in being categorized as a worker?
There are a multitude of factors, but here are four salient ones to consider:
- How much control the employer has over the worker.
- More control, such as deciding hours worked and method of work, is akin to an employee relationship.
- The worker’s opportunity for personal profit or loss.
- More opportunity, such as being paid more or less based on performance, is akin to a contractor relationship.
- The permanency of the relationship.
- More permanency is akin to an employee relationship.
- How integral the worker is to the employer’s business.
- More integral, such as taking on clients or supervising employees, is akin to an employee relationship.
What happens if I’m actually an employee?
This time, you really do get paid either way. It can be costly for your employer, however.
- The employer might be forced to reimburse you wages you should have received, including any applicable overtime wages.
- The employer might have to pay backtaxes for Social security, unemployment, and Medicare.
- The employer might be forced to provide employee benefits and insurance.