As more companies engage with independent contractors and freelancers to get specialized work done, they need to know the different worker classifications to avoid running the risk of tax consequences or employment law violations.
This article will lay out each of the most common worker classifications and how they differ from one another. Once you gain a better understanding of each employment type, you can safely engage with the people you work with and enjoy getting their services with peace of mind.
What is a Worker Classification?
Worker classification–also known as employee classification–is the process of identifying whether an individual is a freelancer, an independent contractor, or a full-time employee based on the standards set by the Internal Revenue Services (IRS) or the Department of Labor (DOL).
The way to determine these classifications is by knowing the nature of these workers’ relationship with you as their employer or client.
Why Do You Need to Determine Worker Classification?
While it’s important to determine the tasks you need to have your employee to work on and how much he or she should be paid, you also need to know what type your worker falls under. Should your worker be a 1099 independent contractor, or a W-2 employee? Would they enjoy the full benefits of working for your company, or just the basic monthly payment for their services?
Determining an individual’s worker classification prior to the engagement allows you to abide by labor laws, not only to protect your business but also to ensure workers are paid fairly for the output they produce.
Also, knowing the worker’s classification allows you to plan for any payments you need to make for withholding taxes, medical care, sick days, wages, and so on.
The 4 Most Common Worker Classifications
As you consider getting more talent to get things done, take a look at the different worker classifications so you know what to expect.
1. Full-time employee
Full-time employees are workers you hire internally and are expected to work for a fixed 40 hours a week or more. They are typically paid on a monthly salary basis, which do not change unless they are subjected to promotions or a salary increase.
On top of that, full-time workers also have access to benefits such as paid vacation and sick leaves, 409(k), health benefits, overtime pay, and more perks.
In some organizations, full-time employees are not required to work for a full 40 hours. Some companies would include these workers on their payroll and pay them monthly, with the expectation that all work is done.
2. Part-time employee
In contrast with full-time employees, part-time workers are individuals who are on the company’s payroll but are not required to work for 40 full hours. They are often required to perform the same duties as that of a full-time employee but need to report to work for a minimum of 20 hours per week.
Some part-time workers enjoy incentives from their employers; however, they typically don’t receive the full benefits package.
Examples of part-time jobs are those working in retail and food services, sales associates, or contact center agents.
3. Freelancers and independent contractors
Freelancers and independent contractors are those who are not included in the company’s payroll and would receive their payment based on the number of hours they worked on a specific project.
In some instances, independent workers are paid based on the task given to them, regardless of the number of hours they spent to finish it.
Freelancers and independent contractors usually pay for their own benefits and are required to submit their own taxes. They also pay for their training, tools, and health insurance.
Some examples of freelancers are rideshare drivers, content writers, web developers, and more. As independent contractors, these workers usually determine their own price and preferred working schedule.
4. On-call workers
Lastly, on-call workers are individuals who are paid based on the number of hours they perform their duties. They need to be readily available when the employer calls. They are also eligible for benefits like overtime pay if they are requested to work in graveyard shifts.
Some caregivers, midwives, security officers, and contact center agents may be considered on-call workers.
Can You Protect your Business From Worker Misclassification?
Yes, and the most important step you need to make to prevent misclassification is to make sure you know which professionals are working independently. For non-core job roles, you can choose to work with independent contractors because they can save you a ton of money and resources, without compromising the quality of output.
No matter what worker classification you decide to get, always weigh your options. Determine if it makes more sense to hire a full-time employee than a freelancer. After that, you can prepare your worker’s contract and make sure to meet the terms throughout the engagement.