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Independent Contractor vs. Employee: A Distinction That Matters

Independent Contractor Vs. Employee: A Distinction That Matters

As a contractor, it’s crucial that you’re aware of the difference between being classified as an independent contractor and an employee. The structure of your working relationship can have important implications for the protections you are eligible for, so make sure that your entire team is on the same page in terms of this distinction.

Which One Am I? 

Any time you engage with a new business relationship, evaluate a number of factors to determine whether you’re properly being classified as a contractor. If the employer shifts things towards a situation where you should be considered an employee, you may have grounds for a misclassification suit. There’s no one list of factors that make it easy to determine which one you are, so think carefully about the following three categories:

  • Supervision and control of the worker: An independent contractor will provide a service but control the terms of when the services are delivered and how they are delivered. Employees, however, usually get a schedule and company supervision to carry out a project.
  • Nature of the Relationship: Is the relationship permanent? Employees are taken on for the long term, whereas a contractor takes work on a per-project basis. This allows an independent contractor to work with several companies at the same time.
  • Investment on the worker’s part: Employees are usually provided with the training, equipment, and facilities to carry out their task, whereas an independent contractor may or may not have access to these. More often than not, contractors use their own equipment.

You may start off working with someone in a role you’d clearly identify as an independent contractor, but expectations can shift over time. You need to be sure you and the  employer recognize these shifts.

How Does the Distinction Impact Me?

There are three major reasons why it matters that you are classified appropriately:

  • Payment: Employees get paid on a salary or on an hourly basis, but an independent contractor works on a project basis, usually getting paid by milestone. In most cases, the terms of payment are referenced in a contract for non-employees.
  • Taxes: While an employee shares tax liability with his or her employer, the contractor is responsible for paying taxes on the money he or she earns. The business is only required to report wages above $600 to independent contractors.
  • Benefits: Employees gain benefits like paid vacation, insurance, and retirement plans, but independent contractors do not.

What To Do If I’ve Been Misclassified

Most New Jersey contractors are classified properly, but if reading this raises concerns about situations where you’re being treated as an employee under an independent contractor relationship, bear in mind that you could be missing out on benefits like health insurance. If the employer is calling you an independent contractor but structuring the relationship to be more like that between an employer and employee, it’s a good idea to talk it through first.

Employers have a lot to lose if they have inaccurately classified an employee as an independent contractor. Doing so could open them up to back pay or other recourse through a legal claim. If you suspect you’ve been misclassified, attempt to address the situation sooner rather than later. Not every employer is clear on the ramifications of making such a mistake or in attempting to alter the business relationship outside of a typical independent contractor setup. Paying attention to what this means for you can help you flag potential problems before they happen.

Conduct a Risk Mitigation Review 

If you’re worried about potential misclassification, add it on the agenda for your twice-yearly risk assessment. This is a good time to review your NJ contractor’s insurance and business planning documents so that you ensure you’re on the right track. Consider implementing an annual training about misclassification for others on your team, too, so that you increase the chances of being treated fairly in your contracting relationships.

Many NJ contractors like the benefits of being an independent contractor such as structuring the working environment and staying in control of the “how/when” of project completion, but that’s only valuable so long as both parties to a contract are classifying the relationship in that way. If someone you’re working with is attempting to alter working terms but not giving you the benefits of being treated like an employee, it’s time to sit down and have a serious conversation.

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