Differentiating Contingent Workers from Contractors: 2024 Guide

Contingent Worker vs Contractor

Nike is currently facing a potential fine of over $300m for misclassifying thousands of independent contractors. That underscores the need for companies to ensure correct classification of workers.

Key Takeaways

Both contingent workers and contractors are engaged on a temporary basis. While contingent workers work under the supervision and direction of the employer, contractors work as independent entities. Employers should differentiate contingent workers from contractors in employment contracts to avoid costly misclassification risks.

What is a Contingent Worker vs Contractor

Contingent workers are also called temporary workers. These workers are hired on a short-term or temporary basis to help complete specific projects or tasks within a company. A contingent workforce is usually hired through staffing agencies or managed service providers. Different types of contingent workers include freelancers, gig workers, part-time employees, on-call workers, and consultants.

Independent contractors, on the other hand, are self-employed individuals or entities with contractual agreements to provide specific services within an organization. Unlike contingent workers, contractors operate as independent business entities and are not subject to clients' supervision.  Again, contractors are not covered by employment laws and are responsible for their own taxes and business costs.

Characteristics: Contingent Worker vs Contractor

While contingent workers and independent contractors are non-permanent workers, they have distinct characteristics that set them apart.

Contingent Workers

• Employed on a short-term or temporary basis
• Engaged to complete specific projects or tasks
• Typically hired through staffing agencies or managed service providers
• Subject to the company's or client's supervision and direction
• Lack of long-term employment commitment

Contractors

• Independent status – they are not subject to the client's supervision, direction, or control
• Work under self-employment arrangements and contractual agreements
• Often hired directly by clients or companies
• Hired to provide a specific service, skill, or expertise
• Retain total control over work hours, methods, and deliverables
• Take care of their business expenses, taxes, insurance, etc

Employment Relationship and Control

One of the key differences between a contingent worker vs contractor is their legal classification and relationship with the hiring agency or organization.

Relationship with the hiring agency

Legally, contingent workers are classified as temporary workers of the staffing agencies or the organization contracting them. Depending on their employment terms, they may be entitled to some employee benefits and protections, including minimum wage, overtime pay, health insurance, and retirement plans.

Contractors, on the other hand, are classified as independent entities. They work separately from the hiring organization and are not entitled to employee benefits and protections. Since they are self-employed, they negotiate their terms of engagement and compensation.

Independence and autonomy

Contingent workers integrate into the company's workforce and work alongside other full-time employees. Thus, they are subject to the same supervision, direction, and control as regular workers.

On the contrary, contractors retain full autonomy and control over their work and are not subject to clients' supervision or control. Unlike contingent workers, contractors do not integrate into the company’s workforce and can work for multiple clients.

Tax Implications of a Contingent Worker vs Contractor

A contingent worker is considered an employee of the agency or organization through which they are engaged. Therefore, the employer is responsible for income tax withholding and providing a W-2 form to the worker.

On the other hand, employers aren't responsible for handling taxes or other deductions for independent contractors. Contractors should pay self-employment taxes and report payments on their tax return.

Payments to both contingent workers and contractors can be deducted as business expenses, providing companies with tax planning opportunities.

Legal Considerations When Hiring Contingent Workers and Contractors

Contingent workers may be entitled to certain employment rights and protections, including overtime pay, minimum wage, and other benefits like health insurance and retirement plans.

Contracts' legal obligations and liabilities should also be documented and clearly stated in the contractual agreement.

Risk Management When Engaging a Contingent Worker vs Contractor

Classifying a contingent worker as a contractor or vice versa can result in legal non-compliance and violation of labor laws. That can expose a company or organization to employee misclassification risks, including:

• Legal penalties and fines
• Reputational damage
• Overdue taxes
• Coverage for employee benefits and protections
•  Court settlements, or awards for violating labor laws.

Case Studies and Examples of Contingent Worker vs Contractor

Below are 3 companies that paid hefty penalties for the misclassification of contingent workers vs contractors.

1. In 2016, Force Corp., ABC Construction Group Inc., and  Juliano and Anderson Dos Santos intentionally misclassified over 400 employees as independent contractors to avoid paying them overtime wages and other benefits. They paid nearly $2.4M in overtime and damages, and an additional $262K in penalties.
2. In 2021, Holland Acquisition Inc. paid over $40M in back wages and damages for misclassifying 700 employees as independent contractors to avoid paying benefits.
3. In 2023, Arise Virtual Solutions Inc., an outsourced customer service provider, was sued by the U.S. Department of Labor for misclassifying over 22,000 employees as independent contractors.

As we can see from the examples, companies end up paying heavily for violating employee rights and protections. That can be avoided through:

• Learning about employee classification regulations in your region
• Creating clear work arrangements
• Hiring through staffing agencies
• Carrying out regular audits of worker classification
• Training your HR teams
• Keeping comprehensive records of hours worked, payments made, etc
• Regular review and update of contractor agreements
• Seeking guidance from compliance experts

Avoiding Misclassification Risks with Playroll

Contingent workers and independent contractors are classified differently, and confusing these types of workers can result in misclassification risks.

Playroll is an innovative employment platform that enables you to hire global teams following the latest labor laws and employment regulations in different countries. We help you avoid misclassification risks through:

• Guidance on classification and compliance
• Global team-building services.
• Accurate, on-time payroll solutions
• HR support
• Automatic tax and contributions deduction

Request a demo

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