Checklist: employee versus contractor

5-step employee versus contractor checklist

This checklist helps you decide whether a worker should be classed as an employee or an independent contractor by considering factors such as the nature of the work, operational control, financial arrangements, tax responsibilities, and the relationship between the parties.

Getting the distinction right is essential for companies to classify workers correctly and meet legal requirements. Use this checklist to assess your organisation’s needs and decide whether to engage an employee or an independent contractor.

1. Nature of the work

• Duration:

  • Employee: Continual role, with no fixed end date.

  • Contractor: Appointed for a fixed term or specific project.

• Scope of work:

  • Employee: Carries out duties directed or managed by others.

  • Contractor: Delivers services to satisfy a specific contract or project brief.

2. Operational control

• Work hours:

  • Employee: Hours are set by the employer.

  • Contractor: Chooses their working times, provided project deadlines are met.

• Location of work:

  • Employee: Works at the employer’s premises or at a location specified by them.

  • Contractor: Often works remotely or from a location of their choosing.

• Method of work:

  • Employee: Must follow procedures and methods set by the employer.

  • Contractor: Uses their own approach and techniques to achieve the agreed outcome.

3. Financial control

• Payment:

  • Employee: Paid regularly (for example, a salary or hourly wage).

  • Contractor: Paid per project or sometimes on commission.

• Equipment and supplies:

  • Employee: Provided by the employer.

  • Contractor: Uses their own tools, equipment and materials.

• Profit or loss opportunity:

  • Employee: Has no direct exposure to profit or loss from the work.

  • Contractor: Can make a profit but is also at risk of loss on the contract work.

4. Relationship

• Exclusivity:

  • Employee: Typically works exclusively for a single employer.

  • Contractor: May supply services to multiple clients.

• Benefits:

  • Employee: Receives benefits such as private medical insurance, pension and paid leave.

  • Contractor: Does not get employer-provided benefits; arranges their own insurance and retirement provision.

• Term of relationship:

  • Employee: Generally expected to be ongoing.

  • Contractor: Engagement lasts only for the contract or project term.

• Integration:

  • Employee: Work is integrated into the business’s regular operations.

  • Contractor: Work is an independent contribution and not woven into day-to-day operations.

5. Legal and tax implications

• Tax withholding:

  • Employee: Employer withholds income tax.

  • Contractor: Responsible for lodging and paying their own taxes.

• Legal liability:

  • Employee: Employer is typically liable for actions undertaken during employment.

  • Contractor: Usually responsible for their own actions and may need to arrange their own insurance.

This checklist provides general guidance and may differ depending on local employment laws and the specific terms of any work agreement. Always seek advice from legal professionals for your particular situation.

Why must companies ensure workers are classified correctly?

Mistakenly treating employees as independent contractors can lead to breaches of employment law, tax obligations and employee entitlements.

Organisations should be alert to worker misclassification because it can create serious legal, financial and reputational problems.

Misclassification can prompt lawsuits, unexpected tax bills and the requirement to backdate employee benefits. Workers who are misclassified may miss out on key entitlements like private medical insurance and paid leave, and disputes can harm a company’s reputation with staff and clients. It can also trigger regulatory investigations, audits and business interruptions, and in extreme cases lead to restrictions on operating in certain areas, limiting growth potential.

For more information on the risks of misclassifying employees as contractors, refer to our comprehensive guide.

One platform to hire employees or contractors compliantly

Whether you need to hire employees, contractors, or both, Remote has you covered.

Our global HR services make it straightforward to hire and pay talent compliantly from anywhere in the world while delivering a strong experience for your whole team.

Remote’s employment experts understand local labour and tax laws, and can help ensure you classify workers correctly as employees or contractors. We manage the legal, tax and payroll complexities so you can concentrate on growing your business without administrative overhead.

Remote is a game-changer for businesses wanting to manage misclassification risk with confidence.

Learn more about our global HR services or contact us to get started today!