By: Clark, Campbell, Lancaster & Munson, P.A.
Q: How is an independent contractor different from an employee, and why does it matter?
A: Businesses hire daily to promote profit and growth, often viewing these relationships as “employment”, but workers are not always employees under the law. When you hire lawn care or some other personal service, you usually do not concern these service providers as your “employee”, issue a W-2, or withhold taxes. Instead, these are typically independent contractor relationships.
Generally speaking, independent contractors provide goods or services but maintain control over how to provide such goods or services. While there is no single test for determining whether a worker is an employee or independent contractor, there are two concepts that are helpful to consider. First, an employee is “economically dependent” on the employer, while the independent contractor is in business for himself. Second, independent contractors maintain primary control over how to deliver their goods or services. It is from these two primary concepts that one can derive the numerous factors used by the IRS and courts to analyze any given relationship.
The distinction between independent contractor and employee is important to businesses, because the distinction impacts how employers must treat those they hire. A business who hires employees must pay both state and federal employment taxes, but the business does not have to pay such taxes for independent contractors. Employees are protected by numerous federal and state laws, and those protections often do not extend to independent contractors. Finally, while businesses are held liable for the actions of their employees, the general rule in Florida (with many exceptions) is that businesses are not held liable for the actions of independent contractors.
As such, it is often advantageous for businesses to identify their workers as independent contractors instead of employees. However, businesses must be careful not to improperly characterize the relationship. Doing so may expose the business to significant liability. Businesses should always carefully review the factors set forth by both Florida and the federal government before characterizing a worker as an employee or independent contractor, and businesses should never base the decision solely on which characterization is most advantageous for the business.
The July 16th edition of “The Law” will discuss valuation of businesses and shareholder interests for buyouts.
Kyle Jensen is a litigation attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. and presented on this topic at the June 25 Central Florida SCORE Business Roundtable in Lakeland. Questions can be submitted online to firstname.lastname@example.org.