Learn the benefits and risks related to independent contractors vs employees, and what misclassifying them means for your business.
Large global companies like Uber, Lyft, and DoorDash and even FedEx have made headlines in recent years because of lawsuits alleging misclassification of workers. This may have left you wondering who is right in these cases. In light of that, we show you the difference between an independent contractor vs employee, benefits and risks, and what misclassification means for your business.
Sometimes called a freelancer or gig worker, an independent contractor is a person or business entity that is retained by another person or business entity to perform work. Independent contractors are not eligible for employment benefits and they are not subject to the same labor laws as employees.
As an independent contractor, you can anticipate paying a self-employment tax and all other income-related taxes. When an independent contractor is compensated, they receive 100% of the agreed-upon fees. Taxes are not taken out and income should be reported.
Similar to an independent contractor, an employee is hired by an organization to complete certain tasks. The difference is that an employer can control where, when, and how the work is completed.
The employer will provide benefits including but not limited to office space and work equipment, paid time off, sick time, health insurance, retirement benefits, and possibly disability and/or life insurance. Some more progressive employers also provide health and wellness-related reimbursements and perks like catered meals and coffee.
Employment is generally classified as full or part-time. In some cases, part-time employees receive fewer benefits than their full-time counterparts. They have the appropriate taxes taken out of their checks and may be eligible for some benefits like health insurance and paid time off when they are sick.
The employer often absorbs most of all of the risks that we associate with contract work.
You benefit from:
Risks of full-time employment:
Erika General, an Influencer Marketing Specialist was a freelancer for a few years and decided to go back to being a full-time employee. She says, “I used to work as a freelancer for 2 years and actually thought I would be freelancing or in different contract roles my whole life. I really wanted to live that digital nomad lifestyle. However, there would be months where I had multiple clients and around 2-6 weeks where I had zero. I would be lucky if I had an overlap, but it wasn’t a consistent occurrence. I guess that’s why I aimed for employment, the consistency. I can still work remotely while traveling but not have to worry about searching for my next client. That’s why I prefer full-time employment. My salary may be lower than my usual project rates, but it’s stable and I can negotiate my benefits as a remote employee.”
A few benefits of hiring people as employees:
The risks to hiring people as employees include:
A few benefits of working as a contractor include:
With great power (like being your own boss) comes great responsibility. The risks to becoming an independent contractor include:
A few benefits of hiring contractors include:
The risks to hiring an independent contractor include:
As an employer, it is very important to classify your workers correctly. Many companies, especially those that hire abroad, prefer to hire people as contractors to avoid the cost of having to set up a local entity. But at the end of the day, those contractors work, exclusively, for one company, which makes them employees. This misclassification can put the company (and contractors) in serious trouble.
Penalties for non-compliance, or what happens when you hire someone abroad as a contractor when, in reality, they are an employee is pretty severe. They can range from backdated payments with interest (for as long as you have been non-compliant) to additional fines, being banned from doing business in the country, and even criminal charges, where non-compliance is thought to be malicious.
At Panther, we believe that everyone wins when you can hire top, global talent as employees. As an Employer of Record (EOR), we help you make full-time hires and comply with all local laws. No need to hire an employee as a contractor, because we can give them the first-class status they deserve. Have questions about remote hiring? Schedule a demo below, today.
Hiring contractors in new countries normally requires weeks of legal paperwork and research on local compliance laws. With Panther, hiring contractors in 150+ countries just takes a couple of clicks.
By automating the contracting and invoicing process, Panther lets you manage a global team of contractors all from one place. It’s the smartest way to hire and manage contractors in 1 or 100 countries.
You can get started on Panther in less than 30 seconds: Sign up here and start hiring contractors for $0.