Independent Contractor vs. Employee: What's the difference?

Compliance
Marissa Taffer
April 23, 2021

Photo by Simon Abrams on Unsplash

Large global companies like Uber, Lyft, and DoorDash and even FedEx have made headlines in recent years because of lawsuits alleging misclassification of workers. This may have left you wondering who is right in these cases. In light of that, we show you the difference between an independent contractor vs employee, benefits and risks, and what misclassification means for your business. 

What is an independent contractor?

Sometimes called a freelancer or gig worker, an independent contractor is a person or business entity that is retained by another person or business entity to perform work. Independent contractors are not eligible for employment benefits and they are not subject to the same labor laws as employees. 

As an independent contractor, you can anticipate paying a self-employment tax and all other income-related taxes. When an independent contractor is compensated, they receive 100% of the agreed-upon fees. Taxes are not taken out and income should be reported. 

What is an employee? 

Similar to an independent contractor, an employee is hired by an organization to complete certain tasks. The difference is that an employer can control where, when, and how the work is completed.

The employer will provide benefits including but not limited to office space and work equipment, paid time off, sick time, health insurance, retirement benefits, and possibly disability and/or life insurance. Some more progressive employers also provide health and wellness-related reimbursements and perks like catered meals and coffee.

Employment is generally classified as full or part-time. In some cases, part-time employees receive fewer benefits than their full-time counterparts. They have the appropriate taxes taken out of their checks and may be eligible for some benefits like health insurance and paid time off when they are sick.

What are the risks and benefits of working as or hiring employees?

If you’re an EMPLOYEE

The employer often absorbs most of all of the risks that we associate with contract work. 

You benefit from: 

  • Having set hours and a steady pay check 
  • Benefits like paid time off, sick time, and retirement 
  • Protection via employment laws and unions (right to organize)
  • Path to a promotion or career advancement
  • Training and professional development (at many companies)

Risks of full-time employment: 

  • Salaries are generally not flexible and raises/promotions are given on the employer’s schedule (usually annually)
  • Some employers don’t allow or actively discourage side jobs and freelance gigs 
  • Some employers require you to sign a non-compete agreement so that if you leave your job you can’t work in the same industry or take current clients with you when you leave 

Erika General, an Influencer Marketing Specialist was a freelancer for a few years and decided to go back to being a full-time employee. She says, “I used to work as a freelancer for 2 years and actually thought I would be freelancing or in different contract roles my whole life. I really wanted to live that digital nomad lifestyle. However, there would be months where I had multiple clients and around 2-6 weeks where I had zero. I would be lucky if I had an overlap, but it wasn’t a consistent occurrence. I guess that’s why I aimed for employment, the consistency. I can still work remotely while traveling but not have to worry about searching for my next client. That’s why I prefer full-time employment. My salary may be lower than my usual project rates, but it’s stable and I can negotiate my benefits as a remote employee.”

If you’re the COMPANY

A few benefits of hiring people as employees: 

  • More control of the tasks, time and work produced
  • Higher sense of loyalty to the company
  • For long-term needs, employees are usually a better option than contractors
  • Constant flow of new ideas added to the company
  • More skills added to your team

The risks to hiring people as employees include:

  • Employees may be entitled to join or form a union
  • You must comply with local laws and regulations on payroll and taxes

What are the risks and benefits of working as or hiring independent contractors? 

If you’re a CONTRACTOR

A few benefits of working as a contractor include: 

  • You can set your own schedule and decide how many hours you want to work 
  • The ability to work with one client at a time or as many as you wish to work with 
  • As a freelancer, you can set your own rates and increase prices whenever you want 
  • Variety of assignments and different types of work that are available 

With great power (like being your own boss) comes great responsibility. The risks to becoming an independent contractor include:

  • Inconsistent work. Freelancers have to constantly find new clients or contracts
  • Increased taxes 
  • Less legal protection (labor laws do not usually apply to freelancers)
  • Need to find and pay for equipment and benefits 
  • Some companies delay payment to contractors for 30-90 days which can cause cash flow issues
  • You’re treated as a second-class citizen because you don’t have the same rights as other employees (particularly, if this company is your only source of income).


If you’re the COMPANY

A few benefits of hiring contractors include:

  • Short-term, you will probably save money because you won’t have to pay the usual contributions and taxes that you’d pay employees (although you usually pay contractors more per hour)
  • Staffing flexibility
  • When the work isn’t central to your business (eg., specific project)

The risks to hiring an independent contractor include:

  • Less control of the tasks, time and work produced
  • Workers will come and go
  • You may not own the copyright of the work created by the contractor
  • You face a risk of audits
  • You face a higher risk of worker misclassification
  • If the contractor works exclusively for you, you’re treating them as a second-class citizen by not providing them with the same benefits that your employees have.

What happens when personnel is misclassified? 

As an employer, it is very important to classify your workers correctly. Many companies, especially those that hire abroad, prefer to hire people as contractors to avoid the cost of having to set up a local entity. But at the end of the day, those contractors work, exclusively, for one company, which makes them employees. This misclassification can put the company (and contractors) in serious trouble.

Penalties for non-compliance, or what happens when you hire someone abroad as a contractor when, in reality, they are an employee is pretty severe.  They can range from backdated payments with interest (for as long as you have been non-compliant) to additional fines, being banned from doing business in the country, and even criminal charges, where non-compliance is thought to be malicious.

Hiring abroad? Panther can help with that! 

At Panther, we believe that everyone wins when you can hire top, global talent as employees. As an Employer of Record (EOR), we help you make full-time hires and comply with all local laws. No need to hire an employee as a contractor, because we can give them the first-class status they deserve. Have questions about remote hiring? Schedule a demo below, today.

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