Independent Contractor Agreements

An independent contractor is usually a form of employment which has less stringent regulations than actual employment where the employee is classified as a permanent w-2 employee. The cache is that on exchange for lenient regulations the independent contractor (“IC”) also foregoes some of the benefits traditional employees receive. Being on a contract basis, the terms and conditions of an IC are different from contract to contract,

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depending on the work they perform and for the most part, two parties are free to enter into whatever arrangement they want (so long as it does not violate the law). Because of this, there exists a chance of exploitation due to the fact that oftentimes, the Company is in a stronger bargaining position. Additionally, as an independent contractor, the IC is responsible for all FICA taxes which includes the employer’s share of social security tax and Medicare tax.

Employee versus independent contracts: the Pro's & Con's

Even if an employee and Independent contractor are hired for similar positions there are a number of differences in both manner of work and the benefits the companies provide to each.

Employees tend to be permanent or long term hires of a company where most of the aspects related to methodology can be dictated by the company. Independent Contractor agreements are mainly for those who wish to be their own boss. When contracting with a company, they do have to follow the directions and obtain the required results for the organization, but the methodology and terms are at their discretion.

As w-2 employees, employees may receive employee benefits from the hiring company, which also makes social security tax, Medicare, unemployment tax contributions as well as other tax payments on behalf of the employee. The independent contractor foregoes these benefits in exchange for more freedom from the regulations generally binding on an employee.

Misclassification of an employee as an independent contractor

There are certain scenarios where the employee may be classified as an Independent Contractor, either intentionally, naively, or by mistake. This results in irregularities in taxes and causes problems for the employee or / and the employer, Misclassified employees would forego the benefits of employment such as overtime, medical leave, insurance, etc, while the employer may lose a hefty sum in reclassification of the employee. Hence it is always better to be aware of certain factors which are used to determine whether in fact, as a matter of law, you have been properly classified either as an independent contractor or an employee.

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8 factor test in determining whether an employee is a w2 employee or an independent contractor

A number of factors if taken place can determine whether your position within the company is that of an employee or an independent contractor

      • Profit or Loss: an employee receivesa compensation

for the work he does for the organization whereas only ICs can realize a profit or incur a loss from the service they provide for the company.

  • Tools & materials: employees are provided by the company itself, while ICs supply their own tools and materials which are essential for completing the task.
  • Work – time: Full time working is done by employees whereas time and duration are at the discretion of the IC.
  • Training & development: If the company provides regular training to an individual then he or she can be classified as an employee. But some orientations or special training may also be provided to the IC.
  • Expense: when carrying out a task for any company, ICs pay for the expenses they incur such as travel, food, etc whereas the company pays for the employee
  • Multiple contracts: ICs may contract with multiple employers simultaneously whereas the employee is restricted from doing so
  • Basis of Pay: a periodic payment such as hourly, monthly, etc is merited by an employee while ICs get paid by the job, project or receive a commission.
  • Benefits: Social Security, Medicare, insurance, etc are provided to employees whereas an IC does not receive such benefits.

These factors are all legal factors which can be used by the Courts or Arbitrator to determine whether an employee has been properly classified. It is important to note, that even if an employee and employer agree via a written contract that there relationship is one of independent contractor status, it is nonetheless a determination by the Court or appointed official to determine if in fact, using the reality of the factors listed, that the employee, as a matter of law, must be treated either as a w-2 or a w-9 employee.