What is the distinction between an employee and a contractor?

The employee v. contractor distinction is among the most important issues in labor and employment law. The distinction determines which laws apply to a worker, thereby affecting the startup and the worker's amount of tax liabilities, the protections a worker receives, compliance with insurance and workers’ compensation requirements, payment methods, benefits eligibility, eligibility for certain equity awards, and so on. Failure to properly classify a worker may lead to material penalties, lawsuits, and even personal liability for the company’s directors and officers, so it's important for anyone hiring to understand what goes into the employee v. contractor analysis.

First and foremost, many founders know (or soon learn) that contractors are usually less expensive and less of an administrative burden than employees. Founders often think that they can elect to treat a worker as a contractor if that worker simply agrees, and that such agreement is sufficient to avoid the significant obligations employees incur. However, this is a serious mistake.

A worker’s classification is determined by law and reality, not contract.

Unfortunately, the law’s determination of employee or contractor status is often ambiguous and enigmatic because the analysis is often made with a multi-factor balancing test and is highly fact specific. Adding to this complexity, the analysis may vary depending on the federal agency conducting the test (e.g. Department of Labor or the Internal Revenue Service) and where the worker is located because each state and some localities (e.g. San Francisco) apply their own laws and standards too.

Still, there are a few factors that are commonly used and ones that founders should keep in mind when dealing with their workers:

- What is the nature and degree of **control** that the company exercises over the person’s performance of their work?

- How many **hours** per week does the person work?

- What is the person’s **duration of work** with the company?

- Does the company provide the **equipment and/or workplace** for the person to do their job?

- Is the person’s work **exclusive** to the company?

- Is the person’s work **integral** to the company?