One of the most significant decisions a company makes about a worker is how to classify the worker. Is the worker an “independent contractor” or “subcontractor”? Or is the worker an “employee”? While these terms are often used interchangeably, the legal difference is significant. Generally speaking, employees have far more legal rights than independent contractors. For example:
Overtime. Under both state and federal law, an “employee” is entitled to overtime pay if he works more than 40 hours in any workweek. An independent contractor, on the other hand, is not entitled to any overtime pay regardless of how many hours he works in a week.
Minimum Wage. Employees are entitled to at least minimum wage ($7.25 per hour) for all hours they work. Independent contractors are not entitled to minimum wage.
Protection from Discrimination. Employees of companies with at least 15 employees are protected by state and federal law from discrimination because of sex, color, religion, national, origin, age, and disability. Independent contractors for companies of any size have no legal protection from discrimination (other than race discrimination).
Employee Benefits. Only employees, not independent contractors, are entitled to participate in employer provided benefits like health insurance and retirement.
Worker’s Compensation. All employers are required to have worker’s compensation insurance to cover injuries their employees – but only their employees – suffer on the job. If an independent contractor is injured on the job, she cannot recover benefits unless she has purchased her own worker’s compensation insurance.
Unemployment Benefits. An employee who loses her job through no fault of her own can apply for and receive unemployment benefits from the state. However, an independent contractor cannot seek unemployment benefits if a work assignment ends, regardless of the reason.
Payroll Taxes. Every employer are required to pay 7.65% of each employee’s wages in “payroll taxes” which are for Social Security and Medicare. The employee pays another 7.65% for these taxes. An independent contractor, on the other hand, must pay the full 15.3% tax themselves. This self-employment tax is in addition to any income tax the independent contractor must pay.
These are only a few of the significant differences in legal protection. If you are classified as an independent contractor, you should seriously consider inquiring if that classification is correct.