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The Difference between Employee, Contingent Worker, and Independent Contractor

When looking outside the company to hire new employees, you have a number of options. If core team members are fully occupied, and you have new tasks that must be handled on an ongoing basis, it probably makes the most sense to hire additional full-time or part-time employees.

If, however, upcoming projects are of limited duration or you need specialized skills unavailable internally, then a mix of full-time employees and contingent workers may be your best bet.

There’s a wide world of talent out there, and you don’t have to approach tapping into it the same way for every individual or job. There are different ways you can engage workers that depend on your particular needs at the time you’re recruiting. But you have to know what you’re doing when you engage workers who are not employees of your company in the traditional sense.

The relationship of various workers to your company is of key concern to federal and state governments, in particular the agencies responsible for collecting payroll taxes. Confusion around these relationships is driving a growing number of lawsuits, and it’s critical that you understand the differences. Here is a fundamental look at worker classifications.

There are three factors determining how workers will serve a business:

  • Their relationship to the company in need of their services (the capacity in which they work)

  • The duration of their engagement (short term or long term)

  • The schedule they work (part time or full time)

Of these three, relationship is most important from a legal standpoint. There are three basic types of worker relationships:

  • Employees: Workers are employed directly by the company for which work is performed.

  • Contingent workers: Workers are provided by a staffing firm to the company for which work is performed and are employees of the staffing firm.

  • Independent contractors: Workers submit their own invoices for services provided. They are neither employees of the company for which the work is performed nor employees of a staffing firm

Factoring in duration and schedule, workers in all three relationship categories could be full time, part time, short term, or long term.

You can’t be too careful when it comes to the area of working with independent contractors. There is a significant risk that the Internal Revenue Service (IRS) may not agree with your interpretation of an independent contractor or contingent worker and may declare that the proper classification of the worker is as an employee.

Likewise, the employee himself may claim that he never should’ve been treated as an independent contractor but, instead, should’ve been treated as an employee, entitled to the various financial and other benefits associated with an employer/employee relationship. You must understand the specific distinctions between independent contractors and employees. Seek the advice of a knowledgeable and experienced lawyer.

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