Ask the Experts: Classification - Employee or Independent Contractor?
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Q: What is the difference between an employee and an independent contractor? I want to ensure I understand the differences when hiring new employees for my business.
A: An employee is usually a worker who performs services and duties under the direction and control of another individual (the employer), to earn a set wage. The employer has control of the employee’s hours, wages, and methods of performing the work assigned to them. The employer withholds income taxes while paying other types of taxes and insurance for the employee. The line cook in your kitchen is a classic example of this type of employee.
On the other hand, an independent contractor is paid on a job-to-job basis and will not be subject to this type of control from an employer. They will work according to their own schedule while using their own materials, equipment, and expertise, without control by any third party. The landscaping contractor you hire to mow the lawn at your business is a great example of an independent contractor.
Even with these classifications in mind, determining whether a worker is an employee or independent contractor is still a tricky one. There is no clear rule explaining the difference between the two, but there are several tests to consider when classifying a worker as an independent contractor.
The Internal Revenue Service (“IRS”) has a 20-Factor test that Michigan courts have used when determining a worker’s employment status for tax purposes. These factors are divided into the following categories:
A: An employee is usually a worker who performs services and duties under the direction and control of another individual (the employer), to earn a set wage. The employer has control of the employee’s hours, wages, and methods of performing the work assigned to them. The employer withholds income taxes while paying other types of taxes and insurance for the employee. The line cook in your kitchen is a classic example of this type of employee.
On the other hand, an independent contractor is paid on a job-to-job basis and will not be subject to this type of control from an employer. They will work according to their own schedule while using their own materials, equipment, and expertise, without control by any third party. The landscaping contractor you hire to mow the lawn at your business is a great example of an independent contractor.
Even with these classifications in mind, determining whether a worker is an employee or independent contractor is still a tricky one. There is no clear rule explaining the difference between the two, but there are several tests to consider when classifying a worker as an independent contractor.
The Internal Revenue Service (“IRS”) has a 20-Factor test that Michigan courts have used when determining a worker’s employment status for tax purposes. These factors are divided into the following categories:

- Behavioral Control
- Financial Control
- Nature of the Relationship
- Whether the employer incurs any liability when terminating an at-will relationship
- Whether the work being performed is an integral part of the employer’s business
- If the worker primarily depends on wages from the employer to pay their living expenses
- If the worker furnishes their own material and equipment
- If the work is customarily performed by an individual as an independent contractor
It is important to note that even though you consider someone an independent contractor, that person may not, in fact, be an independent contractor and may be properly classified as an employee. Proper classification is critical because misclassifying a worker may subject you, as the employer, to additional costs, fines, and even potential civil and criminal liability under the law, including the Workers’ Disability Compensation Act, the Michigan Employment Security Act, and the Workforce Opportunity Wage Act.
It is critical that you review the above factors when determining the classification of an employee or independent contractor. If you have any questions regarding the status of an employee or independent contractor classification, please contact a professional.
Stay tuned for a follow-up article in the August issue of the MRLA Magazine discussing potential legislation that could impact the current landscape of employee and independent contractor classification.
It is critical that you review the above factors when determining the classification of an employee or independent contractor. If you have any questions regarding the status of an employee or independent contractor classification, please contact a professional.
Stay tuned for a follow-up article in the August issue of the MRLA Magazine discussing potential legislation that could impact the current landscape of employee and independent contractor classification.