Businesses that misclassify workers often find themselves embroiled in wage and hour lawsuits or workforce development audits. These businesses could also face tax penalities and lack of insurance coverage in key liability situations.
Often, businesses treat employees as independent contractors because they fail to fully understand the distinction between the two categories. The most important difference is whether or not you have the right to control the work. Other factors, such as where the work is performed, who provides the equipment, how payment is made and if there are set hours, also play an important role.
Generally, an employee is someone whose manner of work the employer has a right to control, even if the employer does not actually exercise that control. True employees are sometimes known as W-2 employees because of the W-2 form issued to them for federal income tax purposes.
On the other hand, an independent contractor is someone you engage to perform a certain task, but whose manner of work you do not have the right to control. You have the right to tell your independent contractor what it is you want done, and you remain free to dismiss them if you do not like the work (depending on your contractual arrangement). Ultimately though it is the results you are interested in. The manner in which the results are accomplished is up to the independent contractor and is not subject to your control. An independent contractor is given a 1099 form to report income for federal tax purposes.
