Difference between an Employee and an Independent Contractor
Independent contractors and employees share many similarities, but there are a few key differences that distinguish them. They have different responsibilities as well as obligations to the businesses that they work for, and those that they work with (both businesses and clients) will have different standards for employees as opposed to independent contractors.
Who is an Employee?
The broad definition that sets employees apart from independent contractors is that they are a person who works for a business in exchange for a specific wage or salary. When someone is an employee, the business that they work for is responsible for processing withholding taxes from each paycheck and file relevant tax forms such as a W-2in the United States. An employee is also entitled to minimum wage benefits from labor laws.
Other distinctions include:
- Eligibility to receive benefits,
- Ability to work for one company,
- Are given training,
- And do not have to provide tools or a workspace
Employees’ jobs often encompass a wide array of tasks and duties, while independent contractors are only responsible for services that are in the scope of their outlined contract.
An employee signs an Employment Contract after accepting an offer from a potential employer. The terms of work are also defined here and can be full-time, part-time or even temporary.
Who is an Independent Contractor?
Independent contractors typically work for themselves and make money by providing their services to clients (either individuals or businesses). Independent contractors are often individuals with specialized skills who work or consult on specific projects.
When a business hires an independent contractor, it is the responsibility of the contractor to ensure they are in compliance. The business is not responsible for providing benefits such as training, workspace, or tools to the contractor. The relationship is akin to that of a business-to-business relationship.
Independent contractors also have the freedom to work for other businesses at the same time. In addition, they are free to set their own hours, choose their workspace and use their own tools to negotiate their own rates and fees, and submit invoices for their work. Their rate may be standard and charged by the hour, and/or depend on the work that they are doing.
They differ from employees by bringing specialised expertise to a job, whereas employees usually receive training. The vast majority of independent contractors get work assignments because they can offer a business a specialised skill that doesn’t require the business to worry about providing certifications, special training, or education, since the contractor will already have the necessary accreditations.
Independent contractors may sometimes have their own employees, partner consultants, or subcontractors that help them complete work tasks.
Contractors sign an Independent Contractor Agreement after negotiating terms with a client.
Since there are subtle differences between independent contractors and employees, the types of contracts used are also different.
In the case of employment contracts, the terms of a relationship between a business and their employee is stated. This includes the following information:
- Job title
- Job description
- Probationally period (usually 3 months)
- Payment terms (salary, hourly, commission, etc.)
- Vacation time, work hours, and overtime
- Type of employment (part-time, full-time, temporary, permanent)
- Information about the company
- Information about the employee
- Any confidentiality, non-solicitation, or non-compete clauses
An Independent Contractor Agreement is used to define how a business and a contractor will work together. These contracts may be provided by either the client or the independent contractor, and include information such as:
- A description of what services the contractor will be provided
- The contract’s duration
- If there is a deposit on the work to be done, and any conditions for late payment
- Details about the contractor and the business hiring them
- How much the contractor will be paid and when
- Information about expenses and intellectual property
Independent Contractor Agreements are usually made after the contractor and client have negotiated terms and discussed the work that needs to be done. Sometimes a contract may only last for the duration of a project, for example, coding a website, and other times the work may be ongoing, like providing marketing support.
The advantages of hiring independent contractors
Hiring employees is a traditional route that many business take, but it isn’t without its downsides. Employees:
- Need to be provided vacation time. This can cause headaches when there are disagreements between the employer and employee as to when the vacation time is to be taken.
- Cost more than a contractor over time due to vacations, benefits, and overtime.
- Are more difficult to end contracts with than independent contractors.
Independent contractors can offer a lot of benefits to businesses looking for support from skilled and trained individuals. Some of these benefits include things like:
- Short-term contracts - if, after a project is complete, either party doesn’t want to continue working together in the future, there is no obligation for either the contractor or the client to sign another contract.
- They tend to specialize. This is great for clients as they get an expert’s advice where they need it, and contractors are able to focus on what they do best instead of generalizing.
- They don’t cost overhead for the employer and contractors can choose their own hours and workspace.
- The flexible nature of the work that independent contractors do inspires productivity.
- Independent contractors are a great way to test-drive potential hires if a company can’t hire a full-time employee currently, but wishes to in the future.
If your company is working with or looking to work with independent contractors, then we’ve got a great solution for you at RemotePass. We’re a Global Payroll & Compliance platform for remote teams, and we make it easy to hire, offer benefits, onboard, manage & pay your global team all-in-one place! Get in touch with us today for more info or any questions you might have, and get started with streamlined hiring, onboarding and payroll for global remote teams.
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