Employee VS. Independent Contractor: What You Need to Know

What is the difference between an Independent Contractor and an Employee, and why is the traditional “employer-employee” relationship changing?

Advances in technology and new market opportunities have changed the scope and nature of the traditional employer-employee relationships. The prominence of the internet has allowed businesses to become more flexible in how they distribute work and who they can outsource certain projects to. The “Independent Contractor” was ambiguously defined in 1990 as an individual whose actual conduct is not subject to the control of the employer. In 2003, the Legislature changed the definition of an Independent Contractor as someone who fits four of these six criteria:

The independent contractor maintains a separate business with his or her own work facility, truck, equipment, materials, or similar accommodations; The independent contractor possesses or has applied for a federal employer identification number from the IRS, unless the independent contractor is a sole proprietor who is not obligated to obtain a federal employer identification number due to state or federal regulations; The independent contractor receives compensations for services viewed as work performed and the compensation is paid to a business rather than a to a single individual; The independent contractor has a single bank account in the name of the business entity for purposes of paying business expenses and other expenses which are related to the actions and services rendered for compensation; The independent contractor works or maintains the ability to work for an entity in addition to the current employer by their own free will; The independent contractor receives compensations for the work done on a “competitive-bid basis”, or the completion of a task as defined by the contractual agreement with the employer.

The characteristics separating the employee and the independent contractor are very important due to federal and state legislation which constitutes rights and responsibilities for employees and employers when both parties are in a legally identifiable, traditional, employee-employer relationship. In some cases, employers will attempt to redefine an employee’s status to evade payments and liabilities such as the Fair Labor Standards Act (“FLSA”). Other employers may attempt to shield themselves from civil liabilities that come with the territory of being an employer.  The traditional employee is granted specific protections and rights by local and federal laws that independent contractor are not. An employer is compelled by federal law to comply with certain tax requirements such as withholding federal income tax, social security, and Medicare, as well as paying the Federal Unemployment Tax.

To avoid the expenses of these tax requirements, an employer may attempt to reclassify a legitimate employee as an independent contractor. Federal laws also regulate the nature of employment specifically regarding minimum wage and overtime pay. To circumvent these laws and avoid the excess expenses, employers will seek to define an individual as an independent contractor, thus making them ineligible. Independent contractors, unlike employees, are not eligible to receive unemployment benefits when they lose their job due to no fault of their own. When an employee loses their job, the employer will have to pay a higher unemployment tax liability. If the employee is defined as an independent contractor, the employer is no longer obligated to participate in the tax liability.

Employers use various strategies and loopholes to attempt to redefine their employees as independent contractors. In some cases, employers use third-party payroll companies and staffing companies which are the technical employers of the employees. Some employers will request an employee sign a document known as an independent contractor agreement, or a Form 1099-Misc, but having an individual sign a document claiming to be an independent contractor does not make them an independent contractor in the eyes of the court. Florida courts, as well as the IRS, have been firm in the principle that an employee cannot waive their employment status by signing a document.

Florida courts determine the employer-employee relationship based on the test of “economic reality.” Each case is anomalous and must be reviewed carefully. There are no single determinants which define the nature of employment for an individual. It is the totality and conclusion of factors and circumstances that are taken into deliberation. Florida courts aver that the relationship, not the form of the relationship, is most important. Even if an individual, who is working for an employer, has signed an agreement stating that he or she is an independent contractor, the courts may rule that the employee is, in fact, a legitimate employee. Due to the complexity and profundity of employment disputes, it is always advantageous to seek professional legal advice.