Employee vs Subcontractor?
October saw the closing arguments in Lawson v. Grubhub, the first trial concerning the status of workers in the gig economy. The central question is whether Lawson, the plaintiff, was improperly hired as a contractor, by Grubhub, a food delivery service that relies on a roster of workers who schedule their own “on-call shifts.” Lawson’s legal team argued the plaintiff was not a contractor, according to the IRS’s definition, but an employee.
What’s the difference between a contractor and employee? It’s a critical question as the nature of our economy continues to change. Classifying workers as contractors — rather than as employees — has been fundamental to the success of companies like Amazon, Uber, and, of course, Grubhub.
The IRS provides a “Fact Sheet” to help you answer the question. (You can find that here: Understanding Employee vs. Contractor Designation). Below, we’ve provided the basics. When classifying your employees you’ll have to decide the extent to which you, the employer, control the behavioral, financial, and relationship aspects of your worker’s work.
A worker is an employee if:
1. The business has the right to direct and control the work performed by the worker. Examples include what tools to use, highly detailed instructions, evaluations systems, and training a worker to do the job.
2. The business directs or controls financial aspects of the worker’s job. How you pay your worker is one example. A regular, hourly wage is one financial aspect to consider. Another example, the reimbursement of expenses, suggests the worker is an employee.
3. How the worker and business perceive their relationship. For example employee-type-benefits such as insurance, pension plan, and leave indicate the worker is an employee. Also, the length of the relationship matters. If the relationship will continue indefinitely, then the IRS will more than likely see the worker as an employee.
A worker is a contractor if:
1. He or she has the right to control when, where, and how the work is performed.
2. He or she takes on the opportunity for profit and loss — suggested by his or own financial investment in the project — as well as the opportunity to seek business and contracts with other organizations.
3. He or she doesn’t receive employee-type-benefits, the project has an end date, the services the contractor provides aren’t a key activity of the business.
The distinction between employee and contractor isn’t always easy. It exists on a sliding scale and businesses are required to weigh all factors when making their worker classifications. You can contact the IRS directly using Form SS-8, if you feel unable to make the distinction. For a faster response, however, call CAS first — because it can take up to six months for the IRS to make their determination.
This is the first of two parts on the Employee / Contractor distinction. In Part 2 we want to show why the distinction matters. Making the wrong classification can lead to fines. Making the right classification may lower your taxes and increase your profits.