Employee vs. Contractor:Control and Relationship

Sometimes in small business, the idea of paying those who work for you as contractors sounds ideal.  But, how does a business owner know to correctly classify a worker as an employee or contractor?

While the line between employee and contractor can be a bit blurry, there are some guidelines in place to help you reach a clearer answer.  The IRS defines independent contractors in this way: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

There are two primary aspects to consider as you contemplate whether to hire an employee or independent contractor:  Control and Relationship.

Control relates to the relationship between this individual and the business.  If you, as the business owner, determine what work is accomplished and you direct how it gets accomplished – the business is in control of that individual’s behavior and they would be considered an employee.  A typical worker that comes into the office each weekday on a regular basis and uses company-provided equipment would be considered an employee. Conversely, if the business is only concerned with getting a job finished and does not feel the need to direct the “how and when” of completing the job, this person would be considered an independent contractor.  Typically, independent contractors are not on-site on a full-time basis, so as a business owner you lose some control as you aren’t able to closely monitor their work.  However, if you can hire a person with a specialized background for a specific task, you could eliminate the expense of training, benefits, taxes, etc.

The Relationship aspect really focuses on how the employer and worker distinguish their association with each other.  If the employer is planning to offer benefits such as insurance and vacation/sick pay, the relationship is more of an employer/employee relationship.  Offering these benefits helps cultivate a stronger relationship and more long-term commitment on both ends.  Typically, employees will feel pride in knowing they are part of a larger, inclusive team working towards a larger goal.  However, if the current business need is more short-term and fluid, hiring an independent contractor may be the way to go.  This works well for a short-term project, but if you are hoping to keep the individual on a more long-term basis, the longevity of this individual could be in question as future jobs come up.  On the flip-side, if you are hiring for a position that you really aren’t sure is necessary or will ultimately work for your company, the flexibility of hiring and firing independent contractors is greater than that of full-time employees.  The relationship aspect in a scenario of an independent contractor is more concise and defined as opposed to an employer/employee relationship with more of a camaraderie feel.

As a small business owner, you will need to determine whether to hire full-time employees, use independent contractors, or go with a mix of the two to help your business achieve the goals that are set. As you think of the best mix for your company, think back to the Control and Relationship aspects above and which will ultimately suit your company and culture the best.

Happy hiring!

Sandy Noble, Onboarding Manager