Subcontractor vs. Independent Consultant vs. Employee

We often hear our clients or other government contractors use “subcontractor” and “independent consultant” interchangeably; however, they are not synonymous. sometimes we hear independent consultants being referred to as “1099s,” which is a misnomer because 1099s will be issued to both unless the subcontractor is an S or C Corporation. An individual may be working for a company as an independent consultant but based on Department of Labor Fair Labor Standards Act (FLSA) guidelines they may actually be determined to be an employee. It is vital to differentiate and classify the worker correctly, or there may be fines and penalties.

A subcontractor has a separate business entity set up (e.g., business license, Federal Identification Number aka Tax ID) and may or may not have employees. For the purpose of this article, we are defining an “independent consultant” as a person who works for himself or herself, uses his or her Social Security number, and does not have a separate business entity set up. An employee is one who typically performs duties dictated or controlled by others. In most cases, an employee is provided with training, tools, and/or equipment to do the job. Employees also may receive company benefits and the employer pays a portion of Social Security and Medicare or state unemployment taxes.

If a company is working with a legitimate subcontractor, there is little risk. One of the Department of Labor’s goals is to protect worker’s labor rights. As someone who is employed by a subcontractor (i.e., a company), he or she is covered by labor laws. For example, within certain parameters depending on the state/jurisdiction, if someone is employed by a subcontractor and is laid off, he or she is eligible for unemployment benefits.

The dicier issue is whether a person should be classified as an employee or an independent consultant. To a lay person, we realize this may be a case of how the person wants to get paid, but it is actually a much larger issue under the FLSA. The Supreme Court has said there is not a single factor to determine whether a person is an employee or independent consultant. It is whether the person “follows the usual path of an employee”.

Here are some of the factors to take into account to determine whether someone is an independent consultant or employee:

  • How integral is the worker to the business? For example, does the worker make hiring decisions or supervise employees? These are generally employee responsibilities. 
  • Does the worker have other customers? Consultants usually have multiple customers. 
  • Does the individual have his or her own tools? Consultants usually provide their own supplies, materials, and equipment. 
  • How long will the worker be engaged with the work effort? If it is a long-term, permanent position, the person is often considered an employee.

Proper classification of all three of these types of workers is the key. When classified correctly your business will not expose itself to cumbersome audits and potential fines and penalties.

Give us a call if you need help managing your employee classifications.