Hiring workers to help run operations is not a decision that business owners should take lightly. There are legal requirements that come with hiring employees vs. contingent workers. Employers that misclassify either group can be legally penalized. Here’s basic information about the types and classification of workers.
Types of Employees
Employees are different from contingent workers in four key ways:
- Employees are on an employer’s payroll as permanent staff members.
- The law protects employee’s rights and pay.
- Employees have access to benefits and perquisites.
- Employers must withhold income taxes from employees’ wages, pay unemployment taxes on their earnings, and withhold and pay Social Security and Medicare taxes.
Full-time employees typically work a 30- to 40-hour week. Common benefits offered by employers to full-time employees include:
- Vacation time
- Additional paid time off
- Health insurance
- Employer retirement plans
Part-time employees work fewer than 30 hours a week and typically don’t qualify for benefits. Employers must pay the same taxes for employing them as if they worked full time.
Temporary employees (Temps) fulfill a business need while allowing employers to avoid the cost of hiring a regular employee. Temps can be hired to meet seasonal demand, fill in for an employee on sick or maternity leave, and many other needs.
Types of Contingent Workers
Contingent workers have become very popular due to the gig economy. Employers basically hire contingent workers as needed. The workers don’t have the protection of labor and employment laws or access to employee benefits.
Contract employees can be a life saver for a busy business owner. These days, you can find a contract employee to perform almost any service from accounting to marketing to administrative support. Contract employees are hired for a specific job at a set rate. A contract employee doesn’t become a staff member and isn’t considered a permanent employee. NPR recently reported that about 20 percent of American jobs consist of workers under contract. A study by Intuit predicted that by 2020, 40 percent of American workers would be independent contractors.
The IRS takes worker misclassification seriously. According to the IRS website, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.”
Keep in mind that if your contractor is discovered to meet the legal definition of employee, you may need to pay back taxes and penalties, provide benefits, and reimburse for wages as outlined in the Fair Labor Standards Act.
Law Depot offers free contractor agreements templates here. You’re able to choose agreements for a fixed job, until a specified date or ongoing.
Seasonal employees are temporary, short-term, and hired for a specific time period like the holidays or other busy time. Examples include a catering company hiring servers during the wedding season or a retail store bringing on additional clerks for the holidays.
Under IRS and Treasury Department regulations, new seasonal employees are not considered "full-time," benefits eligible even if they are expected to work 30 or more hours per week.
You might have heard that working an overnight shift comes with extra pay. However, additional pay isn’t legally required and depends on the employment agreement. The Fair Labor Standards Act (FLSA) does not require extra pay for night work. However, the FLSA does require that covered, nonexempt workers be paid not less than time and one-half the employee's regular rate for time worked over 40 hours in a workweek.
Freelancers typically operate as their own business. Quite often, the term gets used interchangeably with independent contractor, but there can be some differences.
A freelancer is considered a self-employed person who:
- Pays their own self-employment taxes
- Doesn’t have any employees
- Sets their own rates
- Works remotely at their own location, wherever they choose
- Chooses which projects they want to work on
- Works with multiple clients or just one
An independent contractor often functions as a freelancer, but typically will work with one client for a longer time frame. In many cases, independent contractors work for an hourly rate. Furthermore, they might work through a third party or agency but can also work on their own. To create a contract to work with a freelancer, visit the WikiHow blog: How to Write a Freelance Contract.
Hiring and Management Resources
The SmartBiz Blog has a wealth of information about hiring, training, and retaining employees who are happy and productive.
If you’re ready to hire, our comprehensive article has information on how to set up payroll, obtain worker’s compensation insurance, register with the Department of Labor, and more: 14 Tips for Hiring Your First Employee.
To help you determine if you need an employee or a contractor, review the duties, advantages, and disadvantages of each: Hiring Help: Do You Need an Employee or Independent Contractor?
Small Business and Maternity Leave is one of the most popular posts on the SmartBiz Small Business Blog. Included is important information about requirements, implementing a maternity leave policy, and how to prepare for an employee out on leave.
Once you have a team in place, it’s important to know how everyone is performing: 7 Ways to Measure Employee Performance.
Finally, happy employees are productive employees! Here are simple ways to infuse happiness into your company culture: 5 Simple Ways to Make Your Small Business Employees Happy.