Independent contractors vs. contingent workers

Independent contractor and contingent workers – we see and hear these terms being used interchangeably, but are they really the same? While independent contractors and contingent workers share many similarities, there are a few key differences employers should keep in mind when classifying workers.

Independent contractors

Unlike a regular employee on company payroll, an independent contractor, or “1099 employee,” is technically self-employed and may operate as a sole-proprietor or single-member limited liability company (LLC). The main difference between an employee and an independent contractor is how payroll taxes are reported to the IRS. Employees on a company payroll will have taxes withheld for annual income tax purposes; however, an independent contractor is not subject to this requirement.

Independent contractors are not afforded the protections that employees receive under the Fair Labor Standards Act (FLSA). Additionally, independent contractors do not receive the same benefits as employees such as healthcare or unemployment insurance benefits.

The Internal Revenue Service (IRS) specifically lists “doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public” as independent contractors, but it also points out that the independent contractor classification is highly dependent on the facts of each employer-worker relationship. Many independent contractors also work in the “gig economy,” which includes ride-share drivers and other part-time side jobs. Freelance workers are also considered independent contractors.

The IRS considers a worker as an independent contractor if the payer, or employer, 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.” A worker is not an independent contractor if the employer has control over how the work will be completed. An independent contractor has complete control over their hours, the work they are willing to accept, and the methods they use to complete their work.

Because independent contractors are not subject to federal tax withholding requirements, they are responsible for keeping track of their earnings for income tax purposes. An employer is required to provide independent contractors with an IRS Form 1099-MISC (1099) if the earnings exceed $600 from a single payer. The 1099 must detail all earnings for the applicable tax year.

Contingent workers

Contingent workers are temporary employees or independent contractors usually hired to complete a certain project or fill-in temporarily during peak periods. The classification of a contingent worker as either an independent contractor or a temporary employee depends on the amount of control the employer has over the actual work and the way it is completed.

Contingent workers that work in temporary employee positions are commonly found through temporary staffing agencies that maintain payroll for the temporary employee. Employers will have more control over the temporary employee’s schedule and work methods. Some examples include employees who are hired by retail stores during peak holiday seasons, construction workers, and temporary employees hired for the duration of a single project. These temporary employees are usually provided with employee benefits, such as health insurance and retirement benefits.

Contingent workers hired as independent contractors provide their expertise or talent for a specific project or task on a freelance basis. These contingent contractors are able provide the company with a skill that is not readily available in the present roster and are able to retain full control over their schedules and completion of their work. An example of a contingent worker in an independent contractor capacity is a consultant who is hired for the duration of a project in order to provide additional insight that is not available within the workforce.

The Department of Labor (DOL) points out that a common error in employee classification is found in the construction industry where workers are typically hired on an independent contractor or “1099” basis due to the temporary nature of the work. However, these workers do not meet the criteria for independence and should be classified as temporary employees.

Employers must be mindful of proper classification when hiring temporary workers. If the employer is able to dictate how the work will be completed, the worker should be classified as a temporary employee. It is always a good idea to have an attorney review employee classification, especially with some states having additional laws beyond the federal requirements.

Key takeaways and considerations

• Independent contractor classification is heavily dependent on the amount of control the employer has over the worker. An independent contractor is free to set their own schedules and has full control over their work.
• Certain contingent workers can be classified as independent contractors; however, some must be classified as temporary employees. It all depends on the amount of control the employer has over the worker.