Many businesses rely on independent contractors and freelancers when expanding to new locations. However, when doing global hiring, you must classify workers correctly. Failing to do so could invite lawsuits and damage your reputation.
Brands like Lyft, Uber, FedEx, SuperShuttle, and Lowe’s have all faced lawsuits for the misclassification of workers and have paid millions of dollars in settlement.
But you can avoid this by classifying workers appropriately. The first step is to understand the difference between contract and full-time employees so that you can make a more informed decision.
What is a Contractor?
A contractor or a freelancer is a self-employed person who works on a per-job (or per-project) basis. Companies often hire contractors when they have specific tasks to complete within a particular period. Their compensation is based on the number of hours they work or a negotiated rate for the entire project.
Since contractors are not on the company’s payroll, they can work with multiple businesses simultaneously. However, you can sign a non-compete agreement to ensure they don’t work with your competitors as long as they’re associated with you.
What is a Full-time Employee?
As the name suggests, a full-time employee follows a schedule and completes work daily. They are an internal part of the company and may be able to take part in meetings on
As the name suggests, a full-time employee is responsible for the day-to-day operations of a company based on the role they’re hired for. They are an internal part of the company. They may participate in internal company meetings and make decisions that guide their work.
Since they’re on the company’s payroll, they’re entitled to additional benefits, including regular pay, paid vacation, insurance, etc. They also enjoy legal protection and can sue the employer for wrongful termination.
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Contract Worker vs. Employee: 3 Major Differences
Contractors and employees differ in numerous ways. Here are the three main differences.
Payment, Taxation, and Benefits
The most significant difference between a contract and a full-time employee is the way they’re compensated.
Contractor is often paid an agreed-upon wage for their services. It could be based on a per-hour or project basis. They’re responsible for paying their taxes, including self-employment and federal tax. They’re not eligible for other benefits, such as insurance or paid vacation.
On the other hand, an employee is on the company’s payroll and entitled to an agreed-upon monthly salary. Their pay structure also includes additional benefits, including insurance, flexible spending accounts (FSAs), paid vacation, commuter benefits, and more. In addition, the company must withhold and pay appropriate taxes like federal income tax, social security tax, and medicare tax.
Work Hours
Another major difference between contractors and employees is how and when they work. Employees are often hired to work at the direction of the employer. The company decides the work schedule and day-to-day operations of the employee.
However, in the case of contract staffing, employers don’t have control over the time of the day the contractor works on their project. Instead, they are given a project to work on and paid once completed.
Onboarding and Training
Onboarding contractors is a straightforward process. All you need to do is create a legal document highlighting the contract’s terms and conditions, such as the duration of the contract, basic project information, and mutually agreed payment terms.
However, onboarding an employee is a lengthy process requiring them to understand the intricacies of team dynamics. Employers must also ensure the employment agreement is in line with local labor laws.
Regarding training, contractors are given the information required to complete the job. But on the other hand, employees are often given regular training to enhance their skills and performance.
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How to Distinguish an Independent Contractor from an Employee?
Government agencies look at several factors to determine whether a worker should be classified as a full-time employee or a contractor. Here are some questions to help you make an informed decision for global hiring.
- When and where the job is done: Is the work done at the employer’s office, or does the contractor work remotely? Also, who decides the working hours? The worker will be classified as an employee if it’s the employer.
- How is the job done: Does the employer provide the tools and training necessary for doing the job? If not, you can classify the worker as a contractor.
- How long is the worker employed: Is the worker doing ongoing continual work, or are they hired for a specific period or project? If it’s the latter, you must classify them as a contractor.
- What are the restrictions: Can the worker take projects from other companies? If your contract doesn’t allow this, they’ll be considered a full-time employee.
AOR: The Best Way to Avoid Employee Misclassification
An Agency of Record (AOR) is a third-party service provider that acts as an intermediary between a company and independent contractors. They administer the back-office operations regarding contract staffing, including government reporting requirements.
An AOR provider can help you with the following:
- Background checks
- Independent contractor classification
- Onboarding
- Initial and ongoing compliance
- Documentation and audit defense file maintenance
- Contract administration
- Invoicing, expenses, billing, and payments
Since the laws and regulations for worker classifications differ from region to region, it is best to work with an experienced AOR provider who can help navigate the challenges and avoid fines.
Final Verdict
Worker misclassification has monetary and legal repercussions and hurts the company’s reputation. Therefore, it is critical to understand the laws and regulations related to worker classification and follow them before you hire someone.
However, if you are working with independent contractors across states and countries, it is best to work with an AOR provider so you can focus on growing your business with complete peace of mind!
