As back-office specialists who support staffing companies outside of the USA to easily make placements within the USA, we receive a lot of questions about the differences between employees and independent contractors.  We want to help clear up any confusion by offering some helpful guidance on the topic.

In the USA, the proper classification of workers, whether as employees or independent contractors, holds great significance for legal and tax purposes.  For staffing firms, the difference also significantly impacts how you price and markup your placements (learn more here from this article).

Understanding the distinction between these categories is crucial for employers to ensure compliance with labor laws and avoid potential legal complications.  Major fines and back taxes are assessed by government agencies for misclassification (read here about the DOL’s recent misclassification case which may be the largest in history).  Both employees and independent contractors have specific rights, benefits, and responsibilities, which employers need to be well-informed about.

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Table of Contents

Defining an Employee

Rights and Benefits of Employees in the USA

Defining an Independent Contractor

Rights and Benefits of Independent Contractors in the USA

Differences between the USA and UK Market

Using an Employer of Record

 

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Defining an Employee

An employee is an individual who works for an employer under a contract of employment, whether written or implied. State laws may vary, but certain common factors play a role in determining employee status:

  1. Control: Employers generally exercise more control over employees, including where, when, and how they perform their work. Employers may provide detailed instructions and oversee job tasks closely.
  2. Integration: Employees often form an integral part of the employer's core business operations, contributing to the overall functioning of the organisation.
  3. Tools and Equipment: Employees are usually provided with the necessary tools, equipment, and materials to carry out their duties.
  4. Training: Employers commonly provide training and guidance to employees, indicating a higher level of direction and control.
  5. Duration of Work: Employment relationships are typically ongoing and not limited to specific projects or timeframes.

 

Rights and Benefits of Employees in the USA

Employees in the USA are entitled to various rights, protections, and benefits, including:

  • Minimum wage and overtime pay as per the Fair Labor Standards Act (FLSA).
  • Eligibility for employer-sponsored benefits such as health insurance, retirement plans, and paid leave.
  • Protection under employment discrimination laws.
  • Eligibility for unemployment insurance.
  • Workers' compensation coverage in case of work-related injuries.
  • The right to join labour unions and engage in collective bargaining.

 

Defining an Independent Contractor

An independent contractor is a self-employed individual or a separate business entity hired to perform specific services or tasks for a client or company. The key elements used to determine independent contractor status include:

  1. Control: Independent contractors typically have more autonomy in how they perform their work. While the hiring party may define the desired result, contractors have the freedom to decide the specific details of achieving that result.
  2. Independence: Contractors often operate their own businesses, serve multiple clients, and offer their services to the public.
  3. Tools and Equipment: Independent contractors generally use their own tools and equipment to complete the work.
  4. Training: Contractors usually possess specialised skills and training and do not receive significant training from the hiring party.
  5. Duration of Work: Independent contractor relationships are often project-based or for a specific period, rather than being open-ended.

 

Rights and Benefits of Independent Contractors in the USA

Independent contractors do not have the same rights and benefits as employees. They are considered self-employed and are responsible for their taxes and business expenses. Key differences include:

  • Independent contractors are not entitled to minimum wage or overtime pay under the FLSA.
  • They do not receive employer-provided benefits, such as health insurance or retirement plans.
  • Independent contractors are not covered by most employment laws, including anti-discrimination statutes.
  • They are not eligible for unemployment insurance, as they are not considered employees.
  • Independent contractors are responsible for their own liability insurance and are not covered by workers' compensation.

 

Differences between the USA and UK Market

Independent contractors do not have the same rights and benefits as employees. They are considered self-employed and are responsible for their taxes and business expenses. Key differences include:

It's essential to note that while there are similarities in the classification of employees and independent contractors in the USA and the UK, there are also significant differences in the legal frameworks.

In the UK, employment status is a crucial factor in determining the rights and obligations of workers, regardless of whether they are classified as employees or independent contractors. The UK law places a stronger emphasis on the concept of "employment status" rather than a strict division between the two categories. The key distinctions between the two countries' markets are as follows:

  1. Legal Framework: The USA relies on a patchwork of federal and state laws to determine employee and independent contractor classification. On the other hand, the UK primarily uses common law and some statutory tests to establish employment status. This is a major complicating factor in the USA because properly classifying a worker depends on where the worker lives and where the work is performed. For example, a worker who is properly classified as an independent contractor in Georgia may in fact be required to be classified as an employee if they were to reside in California.
  2. Taxation: Both the USA and the UK have specific tax regulations for employees and independent contractors. However, the specific rules and tax rates differ between the two countries.
  3. Employment Rights: While both countries offer certain rights and protections to employees, the specific laws and benefits provided may vary. The UK, for example, provides more extensive rights to workers considered "employees" compared to the USA, which has a more robust system of at-will employment.
  4. Healthcare: The USA and the UK have different healthcare systems, and the provision of healthcare benefits may differ significantly for employees and independent contractors.
  5. Termination: Employment termination laws in the USA and UK vary significantly. The UK generally has more employee-friendly termination laws compared to most US states, where employment is often "at-will."

It's crucial for employers operating in both countries to consult legal experts to understand the nuances and complexities of employment classifications, ensuring compliance with applicable laws and avoiding potential legal disputes. Additionally, labour laws and regulations can change over time, so employers should regularly review their practices to remain up to date with the latest legal requirements.

 

Using an Employer of Record

Leveraging an Employer of Record (EOR) service in the USA, as a UK staffing firm, can have several advantages in handling the employment of workers in the USA. An Employer of Record is a service provider that assumes the legal role of the employer for your workers, managing payroll, taxes, benefits, and other HR-related responsibilities. This arrangement can streamline operations in the USA, especially considering the legal and administrative complexities involved in employing workers in a foreign country. Each Employer of Record (EOR) will offer different services and it is important to ensure that the services offered meet your specific needs.

Agile Partnering is a leading Employer of Record (EOR) in the USA, specialising in supporting UK staffing firms with their expansion into the USA staffing market. As an EOR, Agile Partnering acts as the legal employer for all contract workers, offering tailored back-office solutions to meet the needs of staffing firms.

Here's how Agile Partnering's comprehensive range of services impact UK staffing firms looking to expand into the USA market:

  1. Compliance and Risk Management: Agile Partnering takes on the responsibility of managing the legal and administrative aspects of employing contract workers in the USA. They ensure compliance with US labour laws and regulations, mitigating the risk of potential legal issues for UK staffing firms.
  2. Focus on Growth: By handling financial, administrative, insurance, and legal tasks, Agile Partnering allows UK staffing firms to concentrate on their core competencies—finding and placing top talent. This shift in responsibility enables them to focus on growing their business without being burdened by the complexities of employment compliance.
  3. Back Office Support: Agile Partnering serves as the Employer of Record, meaning they take care of payroll processing, workers' compensation coverage, staffing insurance, and employer support. This comprehensive support system ensures that UK staffing firms can operate smoothly in the US market.
  4. Flexibility and Expansion: With Agile Partnering as their EOR, UK staffing firms can expand into the USA market without the need to establish their own legal entity. This flexibility allows them to explore new opportunities in the US without significant upfront investment and administrative overhead.
  5. Improved Worker Experience: By providing reliable payroll and benefits management, Agile Partnering enhances the experience of contract workers. This positive experience contributes to higher worker satisfaction and retention rates for UK staffing firms.
  6. Risk Mitigation for Independent Contractor Classification: Agile Partnering ensures that contract workers are correctly classified as either employees or independent contractors, reducing the risk of misclassification issues for UK staffing firms.
  7. Embedded payroll funding: Agile Partnering can fully fund payments to independent contractors and payroll to employees, enabling staffing firms to grow without constraint and without concern over credit worthiness of their end clients.

In summary, Agile Partnering's EOR services empower UK staffing firms to enter and succeed in the competitive USA staffing market. By offloading legal and administrative burdens to Agile Partnering, UK firms can focus on their core competencies, making placements, and driving business growth. With the support of Agile Partnering, the expansion process becomes more efficient, compliant, and less stressful, ultimately leading to the potential for explosive growth in the USA staffing market.

Find out more about our EOR Services.

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