What’s The Difference Between Employees And Independent Contractors?

Employees and independent contractors have different legal status in North Dakota. An employer generally controls the “operative details” of an employee’s work. This means the employer generally tells the employee when and how to complete the work. The employer also generally supports an employee with equipment or anything else needed to complete any given task. An independent contractor, as the name suggests, has independence on the how and the why of the job and is self-sufficient in his or her ability to get it completed without assistance. An independent contractor will also generally work for several different people instead of just one and will be paid per job instead of a wage or salary.

Why Is The Distinction Between Employees And Independent Contractors Important?

It’s important for several reasons. Here are several key reasons:

Employees and independent contractors carry different liability risks. An employer is generally liable for the acts and omissions of its employees under a doctrine called respondeat superior. A business generally has no such imputed liability for an independent contractor. This also makes a difference when the employer is insuring over those risks.
Employees and independent contractors are taxed differently. An employer must pay certain taxes on employees it would not have to pay with an independent contractor.
Employers usually have more governmental agency payments and obligations with employees than with independent contractors. For example, in North Dakota, an employer must pay Workforce Safety & Insurance premiums and Job Service North Dakota Unemployment Insurance premiums for employees but not independent contractors.
Employees and independent contractors may have different fiduciary duties. An employee owes a fiduciary duty to an employer. This means the employee has to put the employer’s interests above his or her own interests, generally speaking. If an independent contractor isn’t also an agent, then he or she probably doesn’t have this same duty.
Employers have a different level of control over employees. Employers can directly control how and when an employee completes his or her work. The same control over the operative details cannot be exerted over an independent contractor.

Can I Save Some Money And Liability Risk By Reclassifying Employees As Independent Contractors?

Not so fast. Everyone knows this trick, and you’re unlikely to get away with it. Courts, the IRS, North Dakota Tax Commissioner, Workforce Safety & Insurance, Job Service North Dakota, and the North Dakota Department of Labor don’t care what you label the relationship. Each uses a bit different factual analysis when making the determination, but the basic thread is this: if the employer is telling someone what to do and how to do it, then he or she is an employee and not an independent contractor. They will also look at how the person is paid, benefits, and operational support is given by the employer. If the employer gets caught misclassifying, the business (and in some cases the owners, personally) will be liable for back taxes, late payments, and interest.

This said, there are situations where a person can make a conscious effort to hire an independent contractor to do a job instead of an employee. It’s incredibly important for the business owner to understand what he or she can and cannot do in order to preserve the independent contractor relationship.

This is a complex area of business law. And as always, this is meant for educational purposes only. If you have questions about employees and independent contractors in North Dakota, call or email our Business Law Team.

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