Employees and Independent Contractors: Three Categories to Help You Understand the Difference

There is no single definition as to what classifies someone as an employee, but there’s three categories we can look at to ease the distinction: Behavioral control, financial control, and relationship control.

Let’s examine each category to get a better understanding of these distinctions.

Behavioral Control

The right to control the details of the work being done is known as behavioral control. The amount of instruction given such as when, where, and how the work is being done are included in determining behavioral control. These details alone, however, do not determine your relationship; the IRS doesn’t need you to necessarily exercise your right to control in order for the worker to be an employee, but simply having the ability to control this is sufficient.

Another key aspect of behavioral control is whether or not the person performing the work has regular training by the person receiving the work. If training occurs on a regular basis, you are thought to have an employee-employer relationship.

Financial Control

Financial control has a handful of factors that are looked at before a conclusion can be drawn. Basically, the IRS wants to see if the business has the right to direct and control various economic components of the job being performed.

For example, if the person you’ve hired tells you she’s going to charge $25 an hour and send you an invoice at the end of the week, you’ve got a contractor, not an employee. But if you decide to pay your new hire $16 an hour and cut them a check on a biweekly basis, that’s indicative of an employee.

Relationship Control

Determining relationship control is probably the easiest distinction to figure out for an employer. A contractor and an employer will sign an independent contractor agreement which defines the nature of work and the relationship. If a 'terms of relationship' agreement exists, that is typically looked at as an independent contractor relationship. This is because the terms usually elude to the relationship terminating after a job is completed or once a specific length of time has passed.

An employee will sign an employment agreement which outlines benefits available to them, such as medical, dental, and paid time off. These are important because it provides evidence that an employer-employee relationships does in fact exist.