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Independent Contractor vs Employee

Two legal categories of worker with very different consequences for taxes, overtime and liability - and a label in a contract does not settle which one applies.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

Looking for a lawyer rather than a definition? Skip to the state-by-state list of Business Law firms.

What it means

Whether a worker is an employee or an independent contractor decides who withholds and pays employment taxes, whether minimum wage and overtime rules apply, who is liable when the worker injures someone, and whether the worker is covered by unemployment insurance and workers' compensation. The classification is made by law, on the facts of the working relationship. Calling someone a contractor in a written agreement, paying them on an invoice, or issuing a Form 1099 does not make them one.

There is no single test. Federal tax law asks who has the right to control how the work is done. The federal wage-and-hour law asks whether the worker is, as a matter of economic reality, in business for themselves or dependent on the hiring business. A number of states apply a stricter presumption of employment for some purposes, under which the business must prove that the worker is free from its control, does work outside the business's usual line, and has an independent business of their own. The same person can be a contractor under one of these tests and an employee under another.

Misclassification is the reason the distinction has teeth. A business that treats employees as contractors can be liable for unpaid employment taxes, back overtime, benefits and penalties, and the exposure typically surfaces through an audit or a claim by one worker that then extends to everyone in the same role.

Where this comes from

Federal tax classification follows the common-law control test in Treasury Regulation 26 C.F.R. § 31.3121(d)-1. The Fair Labor Standards Act defines "employ" as to "suffer or permit to work" at 29 U.S.C. § 203(g), which courts apply through an economic-reality test; the Department of Labor's own interpretation of that test has been revised more than once and is stated in 29 C.F.R. part 795. State tests differ from both and from each other - California's presumption of employment, for example, is codified at Cal. Lab. Code § 2775.

When people hire a lawyer for this

The question to bring a lawyer is not "can I call this person a contractor" but "which tests apply to my business in my state, and does this working relationship actually pass them". The answer is often different for tax, for wage law and for workers' compensation, and a business that relies on the label alone usually finds out which test it failed from an agency rather than from its own counsel.

Worried about the cost? A lawyer can be hired for one part of a case only (limited-scope representation), may be paid from what a claim recovers (contingency fee), or may be free through a pro bono program or legal aid; a court can also waive its own filing fees.

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Related terms

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Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

If you cannot afford a lawyer, civil legal aid programs provide free help with many of these problems: civil legal aid programs by state.

Related free reference tools: statute of limitations for a personal-injury claim, by state, quoted from each state's official text - part of LawyerLand's legal reference tools.