The Difference Between Employees and Contractors
The legal difference between employees and contractors is
based on a series of factors:
- If the work is done on the company premises
- Who provides the tools and resources to complete the work
- Who controls the work and work product
- Duration of the relationship
- Skill required
- Whether the hiring party has the right to assign additional
projects
- The hired party's discretion over low long and when to
work
- The method of payment
- The hired party's role in hiring and paying assistants
- Whether the work is party of the regular business of the
hiring party
- Whether the hiring party is in business
- Whether or not benefits are provided
- The tax treatment of the hired party
In determining whether a relationship was employment or contract,
the court will weigh the above factors to make a determination.
Obligations to Employees vs. Contractors
| Obligations |
Employee |
Contractor |
| Required relationship time minimum |
None unless otherwise stated in an agreement or by state law |
None unless otherwise stated in an agreement |
| Agreement required |
No |
No |
| Agreement recommended |
No |
Yes |
| Required to deduct taxes |
Yes |
No unless required by state law |
| Insurance covers acts of |
Yes |
Some times |
| Liable for acts legally |
Yes in performance of employment |
Some times -- but depends on degree of control and circumstances of event. |
Employee Policies
The purpose of company policies for employees is to give
notice and to set uniform treatment and instruction for employees
on performance and behavior at the work place. Generally,
it is a good idea to have employees sign the end of the policy
statement or another document stating that they have received
this information and that they agree to it. It is important
to present the information in the initial hiring session to
be sure that it is legally effective as a binding agreement.
It is important to carefully draft and periodically review
the company policies to be sure that they reflect the actual
actions and procedures of the company. A company's failure
to follow its own policies can cause very bad legal results.
Typical Minimum Policy Provisions
Employment Is At-Will
The Policy should include a statement notifying the employee
that employment is at will and that his or her duties, promotion
or demotion, salary, relocation and all items regarding work
are at the discretion of the employer.
Notice of Inappropriate Acts
The Policy should include a statement instructing the employees
not to engage in criminal acts, not consume or be "high"
on drugs or alcohol at work, not to use the company resources
and equipment, including email and the phone, not to do any harassing,
criminal, defaming, political, illegal or sexual acts.
The Policy should include a statement defining sexual, race,
disability and religious harassment , how to report it and
how the company handles the reports.
Notice of Proper Handling of Confidential Information
The Policy should include a statement to employees of their
exposure to the confidential information of the company and
third parties, what kinds of information are confidential
and employees' obligation not to disclose it or personally use
confidential information, during and after employment, and
the employee's agreement to this.
Notice of Ownership of Work Product
The Policy should include a statement to employees that all
of their work product and all intellectual property
rights in that work, is owned by the company and not to be
used by them personally outside work or by their future employers.
Other Employee Policy Provisions
Non-Solicitation
Some policies include agreement by employees not to solicit
employees to leave the company and work elsewhere for a certain
time period following employment.
Non-Compete
Some policies include agreement by employees not to work
for competitors of company. Non-compete clauses are regulated
by state law and in scope of industry and/or
geography through case law.
Be aware that employee agreements or policies that are too
restrictive or unreasonable will be rewritten or thrown out
by courts. However, for the many employees who either do not
know or do not have the funds to hire an attorney, the policies
may be an effective deterrent nevertheless. On the flip side,
be aware that onerous employee policies and are a strong negative
to educated and talented employees and word will spread among
them.
Contractor Agreements
The primary purpose of a contractor agreement to ensure that
an individual who is a contractor is aware of his or her obligations,
that the parties agree on the services to be performed and
the amounts to be paid, and that the company owns the work
product. While companies may choose, unwisely, to operate
without any employee policies, failing to have a contractor
agreement can be worse because the contractor, by law, owns
her own work product unless otherwise set forth in a writing.
Contractor Agreement Provisions
Services
It is important to clearly define the services to be performed
and any deadlines for work product or performance. Failure
to clearly define what is to be done can lead to each party,
even in good faith, having different ideas and not discovering
this until the work is completed and the company is not satisfied.
The more detail stated in the contract about the relationship,
the less risk of misunderstanding later.
Payment
The agreement should include a provision that states how
much the company is going to pay the contractor and the procedures
for payment.
Relationship
The agreement should include a provision that clearly states
that the relationship is not employer-employee and that none
of the benefits or tax results typical to that relationship
apply.
Inappropriate Acts
The agreement should include a provision instructing the
contractor not to engage in criminal acts, not consume or
be "high" on drugs or alcohol while on company premises
or performing services, not to engage in harassing, criminal,
defaming, political, personal or sexual acts while performing
services, on company premises or using company resources.
This should also include a definition of sexual, race, disability
and religious harassment, how to report it and how the company
handles the reports.
Confidential Information
A provision alerting the contractor to his exposure to the
company's and third parties' confidential information and
the contractor's agreement not to disclose or misuse such
information during performance of services or thereafter.
Ownership of Work Product
A provision to the contractor stating that the company owns
all intellectual property rights in the work product produced.
This clause must be in accordance with the language required
under the Copyright Act.
Non-Solicitation
The agreement usually includes a clause stating that the
contractor agrees not to solicit employees to leave the company
and work elsewhere.
Non-Compete
Some agreements include a provision for contractors not to
work for the company's competitors. This is generally regarded
as a bit onerous as contractors, by nature, must perform services
for many parties and usually, due to their skill set, it is
in one industry for similar companies.
Representations and Warranties
The agreement may include the following, or other, warranties:
- That the contractor will re-perform defective or non-conforming
services for a time period indicated
- That the contractor is a US citizen or authorized to work
in the US
- That the contractor will not infringe third party rights
in performing services
- That the contractor is not violating any other agreement
by performing services
Indemnification
A provision stating that the contractor will indemnify the
company for any breaches of the warranties. Indemnification
means that the contractor has to pay the company for any litigation
costs resulting from her breach of the warranties.
Termination and Term
A provision that regarding how long the contractor will perform
the services and how the either party may end the relationship.
Conclusion
Having employees receive and sign company policies and contracting
individuals sign agreements can greatly reduce both risk and
confusion in your business. You can use a Free Sample Employment Contract, an Independent Contract Sample Contract, an Example of Employment Contract, or a Free Download of Employment Contracts, but you are taking substantial risk. Employee policy statement and
contractor agreement legal forms by the author are available
for purchase here.
1 These can vary substantially for
companies who handle projects for and receiving funding from
the state, county or federal government and considerably between
states, so readers are cautioned to not to rely on this information
and to consult an attorney in their state. Readers are cautioned
not to rely on this article as legal advice as it is
no substitution for a consultation with an attorney in your
state. Based
on jurisdiction and time, the law varies and changes.
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