Contract labor laws exist to protect workers who are not traditional employees. Contract workers are usually hired for a specific project, and once that project ends, they will no longer work for the business that hired them.

What Is Contract Labor?

When a company hires someone to complete a particular project, this is known as contract labor. For example, a business may have plans to manufacture a specific product and needs a workforce to help with construction and packaging. The company employs this workforce until the project is complete. Many companies prefer contract labor to long-term employment, as it can help lower costs. Contract labor is typically used for seasonal or one-time projects and will often involve hiring a group of workers instead of an individual. A labor contract will be used to hire these workers.

Labor contracts are legally binding documents that will outline the agreement between the employer and the contract laborer. Independent contractors are another name for contract laborers. A labor contract describes several different topics:

  1. How long the project will take to complete.
  2. The projected costs of the project.
  3. The amount the employer will pay the laborers.

Employees vs. Contract Workers

It's important that both employers and workers understand the distinction between an employee and a contract laborer. Employees need to know how they are being classified and what this classification means to their rights.

The easiest way to understand the differences between employees and contract workers is to examine the guidelines provided by the Internal Revenue Service (IRS). Unless a business can prove that a worker is an independent contractor, the IRS will consider them an employee. Similarly, the IRS strictly defines what counts as a contract worker for tax purposes.

Both workers and companies can request that the IRS determine whether a worker is an employee or an independent contractor. To request this determination, Form SS-8 must be filled out and submitted. A worker's classification, not their title, determines their work status. A worker's classification is based on how much control the employer exercises, not how they pay the worker.

The more control an employer exercises over a laborer, the more likely they are to be considered a normal employee instead of an independent contractor. A worker's status can impact several issues, including the employer's salary and reporting requirements. Employers should be sure that they are clearly classifying workers in employment or labor contracts.

Regular employees have access to many more legal protections than contract workers. In some cases, employers will incorrectly classify workers in order to circumvent these protections and other legal requirements. For instance, miscategorizing an employee as a contract worker can allow the employer to avoid payroll taxes for social security and Medicare, and also means the employer won't have to follow certain rules of the Fair Labor Standards Act.

Although there is some room for interpretation, the government considers a worker an employee if they are financially and behaviorally dependent on a single business. On the other hand, an independent contractor would be a worker that sets their prices, uses their own equipment, and is not reimbursed for work-related expenses. If you provide a worker with a regular paycheck and list them on your payroll, then they are probably an employee instead of a contract worker.

Independent contractors are people that do work for a company but are not employed by the company on a day-to-day basis. A cleaning service is a good example of an independent contractor. While the cleaning service does do work for the company, they are not actually employees.

An independent contractor usually signs a short-term contract with the company and then will provide an invoice for their work once completed. Working as an independent contractor provides several benefits, including the freedom to finish your work how you wish. Independent contractors also must deal with several disadvantages:

  1. Having to pay self-employment taxes.
  2. Not having access to benefits such as health insurance.
  3. Having to individually pay into worker's compensation and unemployment funds if they want to be able to use these benefits.

Another drawback of being an independent contractor is not having the same legal protections as employees. For instance, there is no requirement that a company pay contract workers minimum wage or provide overtime wages. Contract workers also may not receive protection from discrimination by employers.

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