This page provides answers to the following questions:
1. The company I work for tells me I am considered an "independent contractor." What does that mean?
Most people who perform work for someone else are considered employees of that person or company. However, an alternative arrangement is possible and becoming more common in the workplace, which is to consider those who perform work independent contractors.
If you are an "independent contractor," your working terms are decided by an agreement, known as a contract. The terms of the agreement may be a formal written contract or may just be created by talking. In fact, a contract might be created just by doing things the way they have always been done, without writing down the terms and without even talking about them.
If you are considered a contractor, you may not have the same legal rights as an employee. For example, most federal laws that prohibit discrimination only apply to employees. Another example: an employer is required to pay its hourly employees minimum wages and overtime wages, but contractors don't have to be paid any specific amount. Employers that provide benefits to employees do not have to pay those benefits to contractors. An employer is required to deduct payroll taxes from the pay of an employee. No payroll taxes are deducted from money paid to a contractor.
Both the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) care about whether you are properly classified. Both agencies have guidelines to help you decide whether you should be paid as an employee or as an independent contractor.
3. Can employers just decide that I'm an independent contractor so that they don't have to pay my taxes, wages and benefits?
No. In order for you to be considered an independent contractor, the relationship you have with the person or company you work for must have the characteristics of a contractor-like relationship. Otherwise, employers might be tempted to exploit their employees by calling them independent contractors to evade the laws that specifically protect employees.
There is no single rule or test which determines whether you are an independent contractor vs. an employee. It is the total activity or situation that controls. However, both the IRS and the DOL have developed guidelines to help both businesses and workers choose the correct status.
The IRS wants to be sure that proper federal taxes are being paid. The IRS collects taxes from employers and employees. Taxes are deducted from employee paychecks. The employer is required to forward to the IRS the money collected from the employee deductions. If an employer is not properly taking deductions or forwarding the money, the IRS may act to correct the tax violations.
If an independent contractor is involved, the IRS has no authority to act against the employer, but the IRS does have authority to audit the tax payments of the independent contractor. Contractors who earn over a certain amount also have to pay what is known as a "self-employment tax," which covers their share of Social Security taxes.
Under IRS rules, workers are presumed to be employees. The burden is on the employer to prove that a worker is an independent contractor and not an employee. The IRS has a list of 20 factors to see if a worker is an employee or an independent contractor.
The importance of each factor depends on your particular situation. Those factors are considered as follows:
Control. If the employer can exercise complete control over your job or the product you make, you are an employee. If you are an independent contractor, you can control the way the job is performed.
Supervision. An employee works under extensive supervision. An independent contractor usually works without supervision.
How the work is done. Employees must follow the instructions of the employer as to how to perform the work. Independent contractors can set their own hours and decide how to perform the job or complete the project. The company will review the finished project.
Training. The employer may hold classes, meetings or closely supervise on-the-job to train employees. Independent contractors can perform the work as they choose.
Integration. Employees work with other company employees as part of the daily operation. Independent contractors are not an integral part of the company business, and work independent of company employees.
Who does the work? Employees must do the work as assigned and cannot hire someone else to do it. Independent contractors can hire others to perform the work.
Continuing relationship. Employees have an ongoing relationship with the employer. Independent contractors are hired for a specific job. When that job is finished, the work relationship ends.
Hours of work. The company sets work hours for its employees. Independent contractors can set their own hours.
Where the work is completed. Employees usually work at the company facility or another office designated by the employer. Independent contractors may be able to choose the location where they work, and use their own supplies, office and equipment.
Order of tasks. Employees perform tasks in the order assigned by the employer. Independent contractors decide the order of work to complete the job.
Pay. Employees are paid on specific dates in regular amounts, and may be reimbursed for travel and business expenses. The contract between the company and the independent contractor determines how payment is to be made. Independent contractors may include expenses as part of the contract, or may pay expenses independently.
Work supplies. Employers provide tools and materials to employees. Independent contractors use their own tools and supplies.
Investment in facilities or equipment. Employees do not invest in the facility and do not buy equipment. Independent contractors must invest in their own workplace and equipment.
Profit or loss. The profit or loss of the company does not change the pay that employees earn. Independent contractors can profit or lose money based on good or bad results and time spent working on the project.
Working for more than one company. Employees work for the company that issues their pay. Independent contractors may work for several companies at the same time.
Availability of services to the public. Employees generally serve one employer. Independent contractors can provide services to the general public, advertise services, and recruit new customers--all while working for one or more other companies.
Termination. An employer may usually terminate its employees, and employees may usually quit, at any time, without good cause and without notice. Independent contractors are bound by the agreement to complete certain work, unless there is a legal reason not to.
Distinct business. Employees work as part of the company business and do not offer services separately. Independent contractors have a separately established business, and can promote those services to others.
Skill required. Employees are generally trained for a specific job using specific skills. Independent contractors often perform work requiring high levels of skill or broad experience, because the company is not supervising.
Beliefs of the worker and company. If workers believe they are employees, that belief will be considered in light of the particular situation. If workers believe they are independent contractors, that belief will also be considered. The beliefs of company management are also considered.
The DOL monitors and regulates the wage and hour laws passed by Congress. If, for example, an employee is not paid minimum wages or overtime, the DOL may act to correct the unfair or unlawful wage practices. If an independent contractor is involved, the DOL has no authority to act.
A variety of factors are considered by courts and employers trying to determine whether your status as a worker is properly classified. Although there are other factors, some of the most important are:
Are the services you provide an important part of the business? If your duties are an integral part of the business, that fact leans toward finding you to be an employee. If your duties are not central to the primary business, that fact leans toward finding you to be a contractor.
How permanent is the relationship? More permanent relationships create an employee-employer relationship. Temporary services are more likely to create a contract relationship.
How much do you invest in facilities and equipment? If you are using the facilities and equipment belonging to the business, you are more likely to be an employee. If you have your own facilities and equipment, you are more likely to be a contractor.
How much does the business control what you do? The more control the business has over the work you do, the more likely you are to be an employee. If you are free to perform your services without detailed direction or supervision, you are more likely to be a contractor.
What is your opportunity for profit and loss? An employee usually has a set wage and only shares in the profits or losses of the business under a shareholder agreement or benefit program. A contractor can be more profitable by performing their services more efficiently. The profits and losses of a contractor are not linked to the profits and losses of the business that is using your services.
How much initiative, judgment, or open market competition with others is required? As a contractor, you are free to exercise your own initiative and judgment. You can take advantage of open market competition to set your prices and pick your work. The employee is required to follow directions from the employer and under normal circumstances cannot compete with the employer.
How independent are you from the business that is using your services? The more independent you are, the more likely you are to be a contractor. If you have little independence about when and how you do your job, you are more likely to be an employee.
No. What you are called is not important. Employers in some cases have called their workers "freelancers" or contractors, but after a lawsuit, those workers were actually found to be employees.
Not necessarily: the time or method of payment is not considered when deciding if you are an employee or a contractor. Otherwise, employers could just offer each employee a flat fee for the completion of work, or choose any particular method that might circumvent the laws.
10. When our company has to lay off people, the independent contractors go first. Is an independent contractor eligible for unemployment if that happens?
An employer is not responsible for your unemployment benefits if you are an independent contractor. While employees are always eligible for unemployment benefits if they are laid off, an independent contractor will only be eligible if they pay separately into the state unemployment fund.
11. What happens if I am hurt at the site where I am working? Am I covered by workers compensation if I am an independent contractor?
Like unemployment benefits, an employer is not responsible for workers comp benefits if you are an independent contractor. Most states permit an independent contractor to be eligible for workers comp benefits by paying separately into the state workers compensation fund.
12. What happens if I am harassed at the site where I am working? Am I covered by discrimination laws?
Only employees are covered under federal discrimination laws, not independent contractors. However, some states have discrimination laws that define "employee" more broadly than the IRS and DOL. You should check your state and local discrimination laws to see if you would be covered.
13. I really need to have health benefits. If I am an employee, does the company have to give me health coverage?
Employers are generally not legally required to provide health coverage to their employees. However, if an employer subscribes to an IRS-approved medical plan that covers all employees, that plan must provide coverage without discrimination. If you are an independent contractor, you must provide your own health coverage.
The IRS regulates the amount all people must pay for income taxes and contributions to Social Security, Medicaid, Medicare, etc. These taxes are automatically deducted from an employee's paycheck. As an independent contractor, you must pay your own taxes. However, as an independent contractor, you may also take deductions for all of your business expenses, so you may actually end up paying lower taxes than an employee.
15. I actually prefer to be an independent contractor because the pay is better, and I do not want to have taxes withheld. Can I just agree with my employer that I prefer to be a contractor?
No. If you fit the definition of an employee, your employer is required to treat you as an employee and take payroll deductions. Both you and your employer could be charged a penalty if you try to avoid the wage and hour or tax laws that control the employee-employer relationship.
16. If I want to work as an independent contractor, what should I do so the company who pays me doesn't get in legal trouble?
First, you should have a written agreement that explains why you are an independent contractor and not an employee. The company must be willing to give you broad discretion in how, when and where you perform your duties. You must review all of the IRS and DOL factors and be sure that your agreement considers all of those factors. If the company has numerous people performing the same job that you perform in a company building, using company supplies and equipment, with supervisors controlling your assignments, even an independent contractor agreement may not keep you from being called an employee by the IRS or DOL.
Talking to company management is a good start.
18. I am currently treated as an employee, but I think I should be considered an independent contractor. What should I do?
If you are presently an employee and want to become an independent contractor, your job assignments must be consistent with the IRS and DOL factors. You should discuss your request with management to see if the company is willing to give you the freedom to be an independent contractor.
19. I am currently treated as an independent contractor, but I think I should be considered an employee. What should I do?
If there are job openings you could apply for an employee position. But, if the company does not want you to be an employee, and you feel that the job you are doing fits the IRS and DOL factors defining an employee, the solution may be difficult.
First, you should talk to a legal advisor who can help you analyze your situation. Then, you can decide whether going to management or going to a government agency is the best way to address your concern. Where a company is avoiding employment laws by calling large numbers of workers independent contractors, the DOL may act to enforce federal law.
First, you should talk to a legal advisor who can help you analyze the IRS factors. Even though reporting IRS violations is a protected activity, you might expose yourself to unlawful retaliation. If you want the IRS to determine whether you are an employee, you can file an IRS Form SS-8 (PDF).
The IRS also has a hotline (800-829-0433) where you can make a report. For more information, and/or other ways to report IRS violations, see the IRS page, Where Do You Report Suspected Tax Fraud Activity?
The IRS, the DOL, and similar state agencies enforce wage, hour, and tax laws. Independent contractors must rely on the terms of their independent contractor agreement, or the implied understanding, and would have to go to court to enforce that agreement or understanding. Two possible claims would be breach of contract and breach of promise, sometimes called promissory estoppel. For more information, see our site's agreements page.
The Fair Labor Standards Act (FLSA) is enforced by the Wage-Hour Division of the U.S. Department of Labor. The Wage-Hour Division's enforcement of the FLSA is carried out by investigators stationed across the U.S. who conduct investigations and gather data on wages, hours, and other employment conditions or practices in order to determine whether an employer has complied with the law. Where violations are found, they also may recommend changes in employment practices to bring an employer into compliance.
It is a violation to fire or in any other manner discriminate against an employee for filing a complaint or for participating in a legal proceeding under the FLSA.
Willful violations may be prosecuted criminally and the violator fined up to $10,000. A second conviction may result in imprisonment. Employers who willfully or repeatedly violate the minimum wage requirements are subject to a civil money penalty of up to $1,000 for each such violation.
The FLSA makes it illegal to ship goods in interstate commerce which were produced in violation of the minimum wage, overtime pay, child labor, or special minimum wage provisions.
To contact the Wage-Hour Division for further information and/or to report a potential FLSA independent contractor violation, call:
Toll Free: 866-4-USWAGE (866-487-9243)
TTY: (877) 889-5627
(available Monday - Friday, 8 a.m. - 6 p.m. Eastern Time)
You may also contact your local Wage-Hour Division office.
If you need further information about your state's law relating to independent contractors and/or wish to report a potential state law violation, then you may wish to contact the agency in your state which handles wage and hour/labor standards violations, listed on our site's state government agencies page.
If an agency or a court finds that you should have been treated as an employee, the company could be forced to classify you as an employee. If you lost income or benefits because you were not classified as an employee, you could be compensated for those losses.
There are several different methods under the FLSA for an employee to recover unpaid wages; each method has different remedies.
Wage-Hour may supervise payment of back wages.
The Secretary of Labor may bring suit for back wages and an additional penalty, called "liquidated damages," which can be equal to the back pay award (essentially doubling the damages) if an employer willfully violated the statute.
An employee may file a private lawsuit for back pay and an equal amount as liquidated damages, plus attorney's fees and court costs. An employee may not bring a lawsuit if he or she has been paid back wages under the supervision of the Wage-Hour Division or if the Secretary of Labor has already filed suit to recover the wages.
The Secretary of Labor may obtain an injunction to restrain any person from violating the FLSA, including the unlawful withholding of proper minimum wage and overtime pay.
Your state law may have different methods for recovery of unpaid wages, and different remedies to be awarded to those who succeed in proving a violation. For further information, please contact the agency in your state which handles wage and hour/labor standards violations, listed on our site's state government agencies page.
To file a complaint for unpaid wages under the FLSA, you may either go to the Wage-Hour Division, which may pursue a complaint on your behalf, or file your own lawsuit in court (which may require you to hire an attorney).
Do not delay in contacting the Wage-Hour Division or your state agency to file a claim. There are strict time limits in which charges of unpaid wages must be filed. To preserve your claim under federal law, you must file a lawsuit in court within 2 years of the violation for which you are claiming back wages, except in the case of an employer's willful violation, in which case a 3-year statute applies. However, as you might have other legal claims with shorter deadlines, do not wait to file your claim. You may wish to consult an attorney before filing your claim, but you are not required to have an attorney to file a claim with the state and federal administrative agencies.
Your state wage law may have different deadlines for recovery of unpaid wages. For further information, please contact the agency in your state which handles wage and hour/labor standards violations, listed on our site's state government agencies page.
This page was updated on December 16, 2008