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Employee vs Independent Contractor – Agency Relationship

Cite this article as: Jason Mance Gordon, "Employee vs Independent Contractor – Agency Relationship," in The Business Professor, updated January 11, 2015, last accessed April 7, 2020, https://thebusinessprofessor.com/knowledge-base/employer-vs-independent-contractor/.
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Employer and Independent Contractor - Agency Relationship
This video explains what is the Employer-Employee and Employer - Independent Contractor - Agency Relationship

Next Article: Types of Principal in an Agency Relationship


What is the agency status of an employee as compared to an independent contractor?

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.

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 contract 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.

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.

Discussion: Why do you think employees have a different agency status from independent contractors? Is there any reason or justification for treating employees and independent contractors similarly for agency purposes?

Practice Question: Donald drives for Super, a company that provides a network for drivers to pick up and drop off customers who need a ride. The service is very similar to a taxi service. The individuals driving for Super have their own cars and their own insurance. They work whenever they like. The driver logs into an application that notifies her when a Super customer needs a ride. She confirms that she will provide the ride and she is off. The passenger pays Super directly and Super later remits payment to the driver. What factors in this scenario would be used to determine whether Donald is an employee or an independent contractor?

Proposed Answer

The difference between an employee and an independent contractor is based on the characteristics of the relationship between the employer and individual service provider. To establish this differences can be answered by answering the following questions:

  • Does the company control the person’s work and how he does his job? An employee’s work is controlled by the employer while the independent contractor works without (or with far less) influence from a third parties.
  • Does the company control the business aspects of the person’s job? An employee has her job description dictated by the employer. She acts under the strict direction of the employer. An independent contractor is a separate person from the business and works independently by having a business arrangement with the individual/company that for instance provides a service.
  • Is there a written contract or is the relationship based on employee benefits such as a pension plan, insurance, or vacation allowance? The employee is entitled to receiving a wage for work done and any other work benefits from the employer. The independent contractor on the other hand is only compensated for the work done and does not qualify for any other work benefits such as a pension plan and insurance.
  • After the job is done, will the relationship between the company and the person continue? For an employee, the work relationship with the employer continues even after they have done a job, while once the independent contractor has done a job and has been paid for it, his relationship with the company is over.
  • Is the job a key aspect of the business? The employee’s job is key while the independent contractor’s job is not a core aspect of the business. 

In this scenario, it is very difficult to determine whether Donald should be considered an employee or an independent contractor of Super.

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