Independent Contractor VS Employee

Have you heard that the US Department of Labor has officially removed its independent contractor rule, as of May 6, 2021? If not, well, there you go. If you have, and you're not sure what it means for your business or your team, this is for you.

Here's what we DO know about the Department of Labor Independent Contract rule change

We know that the factors that qualify someone as an independent contractor are more narrow now under this rule. But, they did not define what those new factors are.

Obviously, they’re cracking down on Uber and other gig tools like that. Because of the pandemic, the Department of Labor is also attempting to narrow in on what an independent contractor is, especially in essential worker industries like retail and food services, so that those workers' rights are protected.

We can all get behind that, right?

However, this may not affect your work as a service-based business, freelancer, or even someone who works with them. Before we all freak out about needing to hire our contractors or wondering how we're supposed to work with clients, let's actually get into the difference between an employee and a contractor.

Independent contractors vs employees whats the difference and what do you need to know?

Contractors vs. employees

This all comes from the IRS, which is the only source we really recommend on this subject because, at the end of the day, they're the ones to whom you'd be accountable if you're reporting incorrectly.

Here are the three factors the IRS uses to compare an employee vs. a contractor:
  • Behavioral Control: Are you controlling a person’s work hours, the tools they can use, or even the training they receive to do their job? That might be an employee.
  • Financial Control: If a person’s services are available to the market (yes, including your competition), they’re a contractor or freelancer. If their services are not available to the market, that’s an employee.
  • Relationship: Are you providing benefits for a person’s work? They’re an employee. Are the services they provide critical to your business functioning? Again, might be an employee.
Basically, IRS common-law rules states that 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.

Independent Contractors VS Employees Whats the difference and what you need to know

3 things to be aware of if you're an independent contractor or hire them

Now that you know what the whole hubbub is about independent contractors vs employees in regard to this Department of Labor change, there are THREE things you need to know moving forward.

1. Don't look to the Department of Labor

The Department of Labor didn’t specify the factors of their rule change because they probably want independent parties to have it out in court. This allows them to "see what sticks" so they’re not on the hook for responding to expensive lawsuits as a defendant.

2. The IRS needs to clarify its rules

It’s pretty clear from this law that the IRS hasn’t been doing their job, which is classifying people as contractors or employees. Even the Department of Labor's release discusses how employers are “misclassifying employees as contractors.” Well, newsflash: That’s the IRS’s responsibility.

3. It’s not the contractors who need to worry— it’s their potential clients.

More often than not, things don’t become a legal issue if people don’t make a big stink about it personally. For example, influencers are required to disclose when they got something for free (and that is also technically income they have to report to the IRS).

However, there’s no influencer police coming around throwing them in jail for all their covert sponsored posts. Here at The Contract Shop®, we suspect this law will be like the influencer thing, where the government and/or IRS don't have enough resources to police it. Because of this, it will only become an issue should contractors call out their clients/fight for employment.

Independent Contractor vs Employees whats the difference and what you need to know

Disclaimer: Speak to an employment attorney

Last but not least, a disclaimer: The Contract Shop® was founded by a trademark attorney, not an employment attorney. Please always discuss hiring needs with an employment attorney licensed in your state.

We're sharing this information because we don't want you freaking out about this rule change because it may notactually affect your business. If you're a business owner working with contractors, check to see if they have an LLC or if they're just doing business as their name. If you're a service provider or coach, now's the time to incorporate so that you can protect your contractor status.