What are employees?

Businesses directly hire employees to perform work. The IRS defines an employee, under common-law rules, as anyone who performs services for you if you control what they do and how they do it. Employees also:

• Are on your payroll as permanent members
• Have rights and pay that are protected by law
• Have access to wages and benefits
• Agree to a contract of employment
• Have taxes withheld from their pay
• Must pay mandatory employment costs, including unemployment , Social Security and Medicare taxes

A business hires employees when it can reliably guarantee a need for long-term work. An employee in a long-term role will likely better serve and be more loyal to the business since they’re directly associated with the organization. Employees can develop and train with the business and then contribute those skills back to the organization through their work. Employers also have greater control of how work is completed when it’s tasked to employees rather than contractors. While employees may be more expensive to retain because they’re entitled to certain rights and benefits, they may be more useful to a business that needs long-term work. Organizations can also hire different categories of workers according to the business’s needs, such as full- or part-time employees.

Types of employment and employees

There are several common subcategories within the employee classification. These subcategories aren’t defined in the Fair Labor Standards Act, so employers can define categories of employment on their own.

Full-time employees

Full-time employees typically work at least 30 hours per week and are often paid salaries rather than hourly wages. While 40 hours is considered the average work week, an exempt salaried employee may work more hours since they aren’t eligible for overtime.

A business with 50 or more full-time employees is classified as an Applicable Large Employer. ALE organizations are obligated to provide affordable health care coverage to full-time employees and their dependents under the Affordable Care Act.

Part-time employees

Employees who work less than 30 hours per week are considered part-time. They’re usually paid hourly wages instead of salaries. While employers are obligated to pay the same taxes for part- and full-time employees, part-time employees aren’t entitled to the same healthcare coverage or benefits. Employers may choose to offer benefits to part-time workers, sometimes as a reduced version of full-time benefits, in an effort to improve employee satisfaction and retention.

Temporary employees

Temporary employees are hired on a short-term basis. This is often done due a temporarily increased need for staffing, such as for a specific project or to fill in for an employee on an extended leave. Temporary workers are often hired for casual and unspecialized work. Even if your business goes through an agency to find a temporary employee, you’ll still hire and pay them directly and must withhold taxes from their pay. Temporary employees are also entitled to Social Security and unemployment benefits.

Seasonal employees

Seasonal employees are similar to temporary employees in that they’re hired to meet a short-term increased need for staffing, but on a seasonal basis. Some businesses have peak seasons, such as ski resorts in winter, and may regularly hire seasonal workers only during that period. Like temporary workers, seasonal employees are entitled to unemployment and Social Security benefits. You’re also obligated to withhold employment taxes from their pay.

Leased employees

Staffing agencies sometimes lease employees to a business. These workers are permanent employees of the staffing agency rather than the organization they perform work for. They receive any employment benefits and rights through the staffing agency.

What are contingent workers?

Contingent workers are hired or outsourced by organizations to support fluctuating staffing needs. Some examples include freelancers, consultants and independent contractors. They’re usually hired for specific jobs or tasks, but aren’t employees of the company. Contingent workers are usually self-employed and aren’t entitled to the same labor rights and protections as employees.

Contingent employees have key characteristics:

• They don’t have access to benefits such as health coverage through the hiring organization
• They aren’t protected by labor and employment laws
• They determine how and when they perform work
• They file and pay their taxes on their own, often through their own business
• They receive financial compensation in the form of fees or retainers rather than salaries or hourly wages

Contingent workers are a convenient solution for temporary or fluctuating staffing needs. Once a project is finished, the working relationship ends. These workers often have expertise in their particular specialty and don’t require training by your organization. Because they’re not entitled to the same benefits as employees, hiring contingent workers may be more affordable for a business.

Types of contingent workers

There are different types of contingent workers. Variations in pay, work duration and schedule usually determine how a contingent worker is classified.

Independent contractors

Independent contractor is a term used to describe several subcategories of contingent workers. Contractors sometimes work independently or may be outsourced through an agency. A business may hire a contractor for a specific project or period of time and choose to hire the same contractor repeatedly for various jobs. Compensation is determined before the contractor begins work, and is invoiced and paid out on a schedule agreed to by the contractor and business. Depending on agreed terms, contractors may charge for their services by the hour, by the project or on a retainer basis.

Freelancers

A freelancer is an interchangeable term for an independent contractor. Freelance is often used to describe more casual or creative work. Freelancers drive a large portion of the “gig” economy since much of their work is short-term and casual. As with contractors, freelancers aren’t on your organization’s payroll but instead invoice their services on a project, hourly or retainer basis.

Temporary workers

Temporary contingent workers are often hired for casual and unspecialized work. This may include entry level construction labor or assistance at an event such as a convention or festival. These nonpermanent workers are generally hired on a very short-term basis, such as when an organization is understaffed for a day or two or during a weekend event.

Interns

An intern is an individual who performs work for a business in exchange for work experience. Intern positions are sometimes paid, but are often unpaid or only partially compensated. Internships provide valuable work experience to high school and postsecondary students to help prepare them for careers and other job opportunities. Intern positions are usually short-term arrangements of a few months’ duration. If interns perform well, an organization may hire them as permanent employees.

Consultants

Consultants are self-employed individuals who offer expert advice in their field of specialization, but don’t often perform the work themselves. A business consultant, for example, may advise an employer on how to improve their business operations and create a performance improvement plan, but they don’t implement the strategies. Consultant fee structures can vary, but they typically perform their services on a temporary basis and invoice the business. An organization may hire the same consultant repeatedly over time according to its needs.

Legal classification of employees and contingent workers

While there are some basic guidelines to classify employees and contingent workers, the IRS and FLSA each have their own classification system.

The IRS uses the common law test to determine the degree of control and independence a worker has over their job to classify them as an employee or contingent worker. The test asks the follow questions:

• Does the company control or have the right to control what the worker does and how they do their job?
• Does the business supply tools or control how the worker is paid or whether expenses are reimbursed?
• Is there a written contract in place and are benefits provided? Is the relationship ongoing and is the performed work key to the business?

The test isn’t intended to definitively classify workers. The purpose is to clarify the relationship and amount of control between a business and a worker to help determine his or her classification.

The FLSA also provides a list of characteristics in an effort to classify a worker and what FLSA provisions they’re eligible for. There’s no one test to classify an employee, but factors to consider include:

• How necessary the worker’s services are to the business
• The duration or permanency of employment
• The personal investment a worker makes in the equipment they use
• The degree of control an organization has over how a worker performs tasks
• The worker’s opportunities for profit and loss and amount of initiative, judgement and foresight they have to meet their profit potential
• The degree of independence in a worker’s business operations

Compliance

When hiring, be sure to consider the entire relationship to accurately classify individuals as employees or contingent workers. To avoid penalties, be aware of your obligations and responsibilities to federal and state regulations, such as withholding taxes from pay or providing health care coverage.