Why is it important to be classified as an employee or independent contractor?

While both are independent contractors, and employees are agents of the principal. This distinction is important for determining a principal's liability for the agent's actions. Generally, absent specific instructions to do a task leading to liability, an employer is not liable for the actions of an independent contractor taken on behalf of the principal.

• Note: There are exceptions where an independent contractor may subject an employer to liability for her actions. This is the case when the work performed is inherently dangerous in nature; the tasks performed for the employer are illegal; the work is non-delegable; or the employer ratifies the contractor's actions. A separate cause of action may exist if the employer was negligent in selecting a contractor to perform the duties. That is, she failed to exercise reasonable care in selecting a particular contractor. This may be the case where past performance demonstrated the contractor was unsuitable for the task.

What is an employee?

An employer hires an employee to work on behalf of the employer as part of or in support of the business's core functions. The employee generally works exclusively for the business in the functions for which she is hired. The employer exercises extensive control over the nature, time, and manner of work carried out by the employee. As such, the employee is a general agent of the business to the extent of her authority in the position.

• Note: An individual working on behalf of an employer does not have to be paid to be considered an employee. An unpaid person may be a gratuitous employee. This may be the case when individuals are volunteering for non-profit ventures or working as part of an internship.
• Example: ABC Corp hires me as an internal accountant. I report to ABC Corp from 8:00 - 6:00 on 5 days per week. I work on any and all accounting functions assigned to me by my supervisor.

What is an Independent Contractor?

An independent contractor is not an employee; rather, she or it is a separate business that is hired to perform services for or on behalf of another person or business. One way of thinking of an independent contractor is that she has her own business that services the employer as a client or customer. The employer does not directly control the manner and method by which an independent contractor carries out her duties. Also, an independent contractor generally has more than one customer or client. As such, the independent contractor is only a limited or special agent of the principal-employer.

• Example: I have my own professional accounting practice. I prepare the tax returns for any business or individual who pays me to do so. I do not have any employees. ABC Corp hires me to prepare its annual tax return. I promise to have the return completed within 1 month. I will invoice ABC Corp for my services. I am not an employee of ABC Corp. I am an independent contractor who is hired to perform a specific function for a limited amount of time. While I have a projected deadline, ABC Corp does not control the nature, time, and manner of the services I perform.

Related Topics

• Agency Law (Intro)

• What is an Agency relationship?
• What are the types of agents?
• Employee vs. Independent Contractor
• What are the types of principals?
• What is required to form a principal-agent relationship?
• What are the duties of a principal?
• What are the duties of an agent?
• What is the authority of an Agent to Bind Business in Contract?
• When are Agents liable to principals and third parties?
• What is Respondeat Superior?
• What is a Frolic and Detour?
• When does the Agency Relationship Terminate?