Employment Agreement vs. Independent Contractor Agreements

The Basics on Employment Agreements

There are two basic types of relationships for obtaining the services of another. Employment Agreements state the terms of employment for an employee of a business. Independent Contractor Agreements govern the terms of a job or project whereby a business engages a non-employee independent contractor to perform a specific task or project. The two forms of relationship are treated very differently, and in contexts as diverse as payroll taxes and workers compensation, secondary liability for the acts of another, and intellectual property rights from works for hire.

Although the term “employee” is often used outside the legal context to denote fixed employment based on either a salary or hourly wage, it has a specific meaning under the law of agency. Under agency law, the act of an employee in the scope of his or her employment will be imputed to the employer as if it were the employer itself that acted. A common example of this principle is the purchase of goods and services from an employee of a company, for instance from a cashier for the business. The purchaser is not making a purchase from the employee as an individual, but as a representative from the company. Similarly, if the employee harms the individual, the individual can sue not just the employee as an individual, but the individual’s employer. To reduce this potential liability and to avoid many of the other burdens imposed on employers, businesses often try to classify those working on their behalf as independent contractors rather than employees.

An independent contractor is defined as “one who, in exercise of an independent employment, contracts to do a piece of work according to his own methods and is subject to his employer’s control only as to end product or final result of his work.”1Thus, if an employer can and does give instructions to the worker as to how he or she performs the work (when, how and what), the worker is likely an employee. If the employer only has the right to control the final result, the relationship is more likely one of independent contractor.

A written agreement defining a worker as either an employee or an independent contractor can be persuasive as long as the other provisions of the agreement do not contradict that designation. For example, an independent contractor agreement might not include compensation based on the number of hours worked as opposed to a flat rate of pay per project. Similarly, an independent contractor agreement should not permit the employer to supervise and direct the worker’s activities.

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