by: Run ADP
The terms temporary worker, contract employee, and independent contractor are sometimes used interchangeably, but there are important distinctions between these types of workers. Some of which impact pay, benefits, taxes, and other employment requirements. Here are some key differences you need to know:
When a worker qualifies as an independent contractor, the employer is generally relieved of obligations related to payroll taxes, minimum wage and overtime requirements, benefits, workers’ compensation, and unemployment costs for that individual. However, only a small fraction of workers qualify for independent contractor status.
Independent contractors are generally in an independent trade or business and offer their services to the general public under a contract or agreement. Typically, they provide their own equipment and determine how and when they work. The more control the business has over the individual, the more likely he or she will be considered an employee and not an independent contractor.
Independent Contractor Tests:
Strict federal and state tests must be satisfied for an individual to be considered an independent contractor. The most commonly used test is the Internal Revenue Service (IRS) Common Law Test, which is used for federal tax purposes. This test looks at three categories:
- “Behavioral control”: assesses whether the company has the authority to direct and control the work of the service provider and whether the worker receives training and instruction.
- “Financial control”: considers factors such as whether the worker realizes a profit or loss, makes investments in tools and facilities, and has unreimbursed expenses.
- “Type of relationship”: looks at whether there is a written contract between the parties, the permanency of the relationship, and whether the worker is entitled to employee-type benefits.
Other tests are used for determining whether the individual is considered an employee under other laws. For instance, the Department of Labor (DOL) “economic realities” test is used to determine whether workers are covered by the Fair Labor Standards Act (FLSA) and entitled to minimum wage, overtime, and other wage and hour rules. Under each of these tests, employers must weigh a variety of factors and no one factor stands alone in making a classification determination.
An individual is presumed to be an employee (and entitled to all the rights and benefits provided to employees), unless he or she meets the criteria established by federal and state tests. If an independent contractor classification is ever challenged, you will need to show that the worker meets these criteria. Therefore, before classifying any individual as an independent contractor, carefully review each test and consult legal counsel if you have questions.
Temporary workers can be a great resource for helping employers meet short-term business needs, such as an increase in production demands or filling in for an employee who is on a leave of absence. Employers often use a third party, such as a staffing agency or a recruiter, to find temporary workers, but sometimes employers source them directly. Temporary workers may work full-time or part-time, are paid by the hour or a salary, and they typically work on the employer’s premises using the employer’s equipment. The staffing agency and/or employer typically determine how and when work is performed. Temporary workers are generally considered employees and have rights and protections that aren’t available to independent contractors.
Some employers enter into short-term contracts with temporary workers, although this practice is typically reserved for highly skilled workers. For example, a medical office might have a contract with a doctor to fill in for another doctor who is on leave. Remember, just because you have a contract in place, it doesn’t necessarily make the worker an independent contractor. The relationship must satisfy all applicable independent contractor tests, otherwise the individual must be treated like an employee.
Who is the temporary worker’s employer?
The origin of the working relationship could influence who is considered the temporary worker’s “employer” for the purposes of complying with federal, state, and local laws. If the employer hired the temporary worker directly, they would be an employee of that employer. If the employer used a staffing firm, the parties may be considered joint employers depending on the circumstances. For the purposes of the FLSA, the DOL generally considers joint employment to exist when:
- There is an arrangement between the employers to share the employee’s services;
- One employer is acting directly or indirectly in the interest of the other employer (or employers) in relation to the employee; or
- The employers are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under common control with the other employer.
Note: If you are considered a joint employer with a staffing firm, both you and that firm (both individually and jointly) may be held liable for any FLSA or other employment violations, even if that individual isn’t technically on your payroll.
If you work with staffing agencies or recruiters for temporary employees, make sure you understand the rules regarding joint employment and how they may apply to your relationship. Additionally, ensure that contracts with these third parties address compliance with applicable federal, state, and local nondiscrimination laws, payroll tax obligations, minimum wage and overtime requirements, benefits, workers’ compensation, and unemployment insurance.
If you hire temporary workers directly, make sure you comply with all applicable laws with regard to these workers. If you don’t intend to enter into contracts with these employees, be clear that their status is at-will (meaning you or the employee may end the employment relationship at any time for a lawful reason) and avoid any implied or express promises about the length of employment. Note: At-will employment is recognized in every state but Montana.
Using temporary workers and/or independent contractors can provide a cost-effective way to help meet temporary business needs. But, employers must make sure they understand the differences between these types of workers and comply with all rules that apply.