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Independent Contractors: Overview

Independent contractors perform compensated work for businesses and individuals, but they are not considered to be employees. The independent contractor relationship is usually created and based on an oral or written arrangement between the business and the contractor. If the agreement is in writing, it may provide specific standards for the work in question, and establish the pay rate for that work. Independent contractors have more freedom over their work and the ability to contract with a range of businesses, but they do not receive many of the legal protections that employees do.  Following is a discussion of the nature of independent contractor work and related legal issues. 

Rights & Duties of Independent Contractors

As an independent contractor, the "hiring" company is not your employers, but your customer. Independent contractors have the right to decide when, where, and how a given project should be completed. If you are an independent contractor, the businesses hiring you are not entitled to direct your work. Generally speaking, your customer specifies the desired outcome of your work, and you have the freedom to determine how to achieve that outcome.

While clients cannot directly oversee the work, that does not mean that independent contractors have free rein on all aspects of the relationship. Independent contractors must complete their assigned projects on time and according to the specifications set forth in the independent contractor agreement.  Also, since companies don't withhold taxes for independent contractors, independent contractors have a duty to pay their own taxes each quarter.

Defining the Independent Contractor 

Under federal law, a worker is either an employee or an independent contractor. The determination is measured by the degree of control the employer has over the independent contractor, versus the degree of independence the independent contractor has from the employer.

There is no single rule or test for determining whether individuals are employees or independent contractors. The determination is made by reviewing the situation as a whole, including such factors as:

  • The extent to which the services rendered form an integral part of a business;
  • The permanency of the business relationship;
  • The amount of the worker's investment in equipment or materials;
  • The nature and degree of control by each party;
  • The worker's opportunities for profit and loss;
  • The degree of independent business organization or operation;
  • The amount of initiative, creativity and foresight required for the worker to succeed against others in open market competition.

Certain factors are irrelevant in assessing whether an independent contractor relationship exists. Factors such as the absence of a formal independent contractor agreement, the time or method of payment, or the worker's licensure by the state or local government are not typically determinative in the decision.

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