Independent Contractor and Employee Definitions

Julie Alexander Updated by Julie Alexander

Independent Contractor and Employee Definitions

The topic of defining workers as employees (W-2) or independent contractors (1099) can be tricky. This comes up frequently in the work we do together and to better serve you, our members, we would like to share some resources – especially as the laws are changing – so that you can make sound decisions for your organization. 

It is important to underscore that the risk of non-compliance can lead to Department of Labor audits and steep fines or penalties.

You are responsible for making the decision regarding these distinctions, and while we can share our knowledge around the bright lines of the rules, we are not lawyers ourselves, so we strongly encourage you to consult with an employment lawyer if you are unsure about how to handle a particular situation. Below are some resources that can help you with these definitions and remain compliant. 

How the IRS defines Employees and Independent Contractors

Here are links to standard definitions, as defined by the IRS:

The newly defined Independent Contractor Rule, effective in 2024The US Department of Labor “independent contractor” rule restores the multi-factor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor. The rule addresses six factors that guide the analysis of a worker’s relationship with an employer, including any opportunity for profit or loss a worker might have; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence of the work relationship; the degree of control an employer has over the person’s work; whether the work the person does is essential to the employer’s business; and a factor regarding the worker’s skill and initiative.

* Remember that an employer-employee relationship may exist regardless of how the hiring party describes it. For example, if you give a worker a 1099 Form rather than a W-2 Form, and have signed an agreement to waive employee rights, they may still be an employee as defined by the Department of Labor. 

General takeaways from our employment lawyer:

  • The NY State Dept of Labor takes a hard line approach to employees versus independent contractors. 2024 brings new independent contractor rules and they are really cracking down.
  • The important piece from the above definition is that an employer-employee relationship can be described in these terms: whether the work the person does is essential to the employer’s business.
  • The New York State Department of Labor considers that once an individual is paid as an employee (W-2) of your organization, any and all work they do for your organization – particularly in the same tax year – should be paid as employee (W-2) or you could risk non-compliance and penalties.
  • It is important to have written agreements with your independent contractors and your employees outlining the nature of your relationship. *Note the Freelance Isn’t Free Act, which states that all freelance workers (i.e., independent contractors) must have a written contract when engaging their services if the cost of a single project is equal to or exceeds $800, or if the freelance worker has provided multiple services to the business within a 120-day period that equals or exceeds $800 in the aggregate. This act will be effective May 20, 2024.
  • If you feel that you have a gray area situation and need more support in making a decision, it is important to contact an employment lawyer. 

Please keep these classifications in mind as you make requests to your Financial Operations Lead for independent contractor payments and your Workforce Administration Lead for employee payments. When necessary, we can recommend an employment lawyer if you need further clarification.

We hope to serve you by helping you understand these guidelines and minimizing the risk to your organization.

We are working on setting up a session with a domain expert that we can all attend – please stay tuned!

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