Independent Contractors: Pros and Cons, Workers Compensation and Ownership Rights

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 Independent Contractors: Pros and Cons, Workers Compensation, and Ownership Rights

An independent contractor is someone who works for a company, either under a contract or on a case by case basis. It is important to note that although independent contractors are employed to do work for a company, they are not considered to be employees. There are some pros to being a contractor, such as:

  • Control over where and how you work, as well as control over how each task is to be performed;
  • Taxes are not withheld from your paycheck;
  • More flexibility in regards to your working hours; and
  • Control and flexibility in regards to what projects you take on.

However, there are also some cons to being a contractor:

  • Paying for insurance and health benefits entirely on your own;
  • Responsibility for all taxes on contracting income;
  • Sole responsibility for any injuries that result from your work; and
  • Fewer protections against workplace discrimination.

One of the biggest cons to independent contracting is your inability to collect workers compensation in the event of an injury. In general, independent contractors are not eligible for workers’ compensation benefits. However, whether or not independent contractors are eligible for workers’ compensation depends on state law and the terms of employment.

There are some exceptions to this rule, such as being hired to do work that is particularly risky or inherently dangerous. An alternative to workers compensation for independent contractors is purchasing workers compensation insurance. If injured on the job, the independent contractor would file a claim with their insurance provider.

In terms of work ownership, the law is fairly straightforward. The independent contractor generally owns the rights to their own work. This means that they typically have ownership rights to any work they have created. An exception would be if the contractor and the employer have signed a written agreement that specifies the employer as the owner of any and all works created by the contractor for that specific job.

What is the Difference Between an Independent Contractor and an Employee, and Why Is It Important to Determine If I Am an Independent Contractor?

What makes an independent contractor different from an employee is that they control what work they take on and how they complete the work. Once again, this is different from an employee-employer relationship where the employer controls when, where and how the employee’s work is completed. Further, independent contractors do not have taxes withheld by their employer.

Additionally, most labor and employment laws do not apply to independent contractors. One of the main ways to differentiate independent contractors from employees is to look at how the worker is being compensated for their work. If you are on the payroll and are consistently receiving paychecks, you are likely classified as an employee.

There are some other factors that designate a person as an independent contractor instead of an employee:

  • The contractor provides all of their own equipment necessary for completing the job;
  • At any time, the contractor may be dismissed without due process;
  • At any time, the contractor may choose whether or not to return to work without fear of losing their employment; and
  • The worker is in control of their working hours.

Each state has their own rules determining if a worker is an employee or an independent contractor. In general, if a person is an employee and not an independent contractor:

  • Work hours are set by the employer, not the employee;
  • The employee cannot accept or reject projects at will; and
  • The company provides all necessary tools to complete the work required.

What Does “Sole Responsibility” Mean for an Independent Contract?

As mentioned above, independent contractors are solely responsible for their actions and inactions, as non-employees. Typically, in the contract arrangement between the independent contractor and the company which hires them for a job, the independent contract will warrant that they will act as an independent contractor, not as an employee or agent of the company.

This means that for many jobs, independent contractors will have to hold some sort of liability insurance, should their actions or inactions result in any legal claims against them or the company. Further, independent contractors are not authorized to enter into any contracts or agreements on behalf of the company who hired them.

How Can Independent Contractors Protect Themselves?

Once again, the best way for an independent contractor to protect themselves from being sued is to carry some sort of liability insurance plan. Additionally, independent contractors should perform their obligations as specified under the contract in the safest manner possible.

Further, the independent contractors should never operate outside their agreement with the company who hired them by contracting with third parties or otherwise creating obligations for the company.

Can an Employer Classify a Worker as an Independent Contractor to Avoid Paying Benefits?

In short, no. Misclassifying an employee as an independent contract will result in the employer being penalized. The reasons for classifying an employee as an independent contractor are simple: the employer will be able to avoid paying for expenses. These may include employee benefits, workers’ compensation insurance, overtime, as well as social security and medicare taxes.

However, the United States Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”) both perform regular audits of companies to prevent these types of expense avoiding tactics by employers.

As for the penalties themselves, the penalties levied upon the company will vary depending on whether the misclassification was intentional or unintentional. If the IRS believes that the employer intentionally or fraudulently misclassified workers as independent contractors, more serious fines will be imposed. Additionally, criminal penalties may also be imposed, including fines of up to $1,000 per misclassified worker and prison time.

How are Independent Contractors Taxed Differently From Employees?

As mentioned above, employment and labor laws do not apply to independent contractors. This means that companies which hire independent contractors are not required to withhold income tax, Medicare, or Social Security from the wages paid to the contractors. However, companies are required to withhold taxes from their employees.

As for the taxes, a company is required to report all of the money paid to their employees during the year on a W-2 form. In contrast, companies are only required to report payments made to an independent contractor of $600 or more in a calendar year. This must be reported via a form 1099 to the government.

Do I Need a Lawyer for Any Issues with an Independent Contract?

As can be seen, there are numerous legal issues that may arise from a worker’s status as an independent contractor. Therefore, if you are an independent contractor, it is in your best interests to consult with a well qualified and knowledgeable contract lawyers.

An experienced employment law attorney will be able to review the contract between you and the company that hired you. Additionally, they will be able to represent you should any issues arise regarding your work performed under the contract.


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