What's the Difference Between an Employee and an Independent Contractor?

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The workforce is a very important part of Nigerian economic development as many industries largely depend on them for their growth. A country's workforce is divided into two main categories- Employees and Independent Contractors or Service providers.

It is important to distinguish between an independent contractor and an employee to enable businesses understand the legal and financial implications of hiring either of them. Consequently, it is important to note that the cost of maintaining employees is significantly higher than the cost associated with hiring independent contractors due the requirement of the Labour Act which entitles employees to employment benefits which independent contractors are ordinarily not entitled to.

In addition to this, employees enjoy maximum protection of the law under the Labour Act, Employee's Compensation Act and other employment laws in Nigeria. Suffice to say that the need to understand the distinguishing factors between employees and independent contractors can not be overemphasized.

Definition of Terms

An Employee also known as a worker is an individual who works either part-time or full time for an employer under a contract of employment, whether oral, written, express or implied and has recognized rights and duties.

An Independent Contractor also known as a service provider is a person or an organization contracted to provide services to another entity (the client) under a contract for service.

How to determine whether a person is an employee or an independent contractor

1. Contract of Service- Employment Agreement

Under the Nigerian law, the relationship between an employer and an employee is that of a master and servant relationship, hence a contract of service is created at the inception of this relationship. This is so because the employer is directly in control of the work-related activities of the employee. Such as the time of work, the tools and equipment used for the work, when and where the work should be done and the manner in which the work must be done.

Note that for employment relationships, the parties need to sign an Offer Letter and an Employment Agreement.

2. Contract for Service- Service/Independent Contractor Agreement

This an agreement between an independent contractor and a client to carry out a specific project or assignment for a fee. In this case, the independent contractor who is considered an expert in the service he is contracted for is in direct control of how work is done and provides the requisite work tools for the job.

For independent contractor relationships, the parties need a Service Agreement and/or Engagement Letter to define and regulate their relationship.

Major Differences Between an Employee and an Independent Contractor

It can be sometimes difficult to correctly identify the differences between an employee and independent contractor hence, having a classification process that puts policies in place for hiring and managing employees and/or independent workforce is incredibly important because misclassifying an employee as an independent contractor may attract costly legal implications. This section will identify and give precise differences between employees and independent contractors.

1. Independent Contractors are in Direct Control of Their work

Independent contractors control their work, the manner and time their work is done and the tools and equipment used to do their work. Unlike employees, independent contractors are not subject to control by their clients and their work is done with little or no supervision.

2. Independent Contractors Provide Their Own Work Tools and Equipment

Independent contractors usually provide their own work tools and equipment. While employees use the work tools and equipment provided by their employers. Also, unlike independent contractors, employees may be required to work from offices provided by employers.

3. Independent Contractors Usually Operate their Own Businesses

Independent contractors usually operate as sole-proprietors, partners and companies. It is not uncommon for independent contractors to have a business name and work for multiple clients. While employees operate only as individuals.

4. Independent Contractors Openly Market Their Services

Independent contractors openly market their services because they are in direct control of their business. Conversely, many employees are not allowed to work for other employers as they are limited by a Non-compete Agreement or other provision that may limit or prevent them from engaging in other paid employment.

5. Independent Contractors are Experts in Their Industries

While employees receive some sort of training for their jobs, independent contracts bring their specialized expertise to their work. Consequently, independent contractors may not require any special training to do their work.

6. Independent Contractors are Responsible for Their Own Taxes

While employers withhold and remit taxes on behalf of their employees, independent contractors on the other hand remit their own taxes and usually withhold Value Added Taxes (VAT) and remit same on behalf of their clients.

7. Independent Contractors are Ineligible for Employment Benefits

Under the Nigerian Labour Act, only employees are eligible for employment benefits. These benefits include bonuses, allowances, insurance, retirement plans, etc. Also, independent contractors do not receive legal protections such as Worker's compensation, right of association with trade unions, etc. as the employees.

8. Independent Contractors Generally Control their Payment

Unlike the employees who receive specific salary at a fixed period, independent contractors are generally paid a fixed lump sum or through an invoice system. They may have a standard billing rate for their service which is usually paid after an invoice has been issued to the client.

9. Employees Usually Work for an Indefinite Period of Time

Unlike independent contractors, employees usually work for an indefinite period of time. While independent contractors are usually engaged for a specific project and shorter period of time.

10. Independent Contractors may Subcontract or Delegate Their Work

Generally, independent contractors may contract sub-contractors to do their work since they have control of how their work is done. While employees are required to do their work themselves except in cases where a supervisor or head of department may be allowed to delegate work to members of their team who are also employees of the employer.

How to Determine If You Should Hire an Employee or an Independent Contractor

Making a decision to hire an employee or independent contractor can be a very daunting task. This section will provide guidelines on determining who should be hired. These factors include:

- The nature of work to be done: A business may choose to hire an independent contractor if they only need a specific work to be done or work to be done within a limited period of time.

Also, if the work is essential to the business and not a peripheral job, an employee should be hired. For example, a cashier person is essential in a bank while a cleaning crew may not be very essential. Hence, the bank must hire cashiers as employees and may hire a cleaning service agency as independent contractors.

- An expert opinion is required: An independent contractor may be hired where an expert opinion is required. For example, a company may hire a law firm as its external company secretary for the purpose of attending board meetings and proffering legal advice before making core business decisions.

- Exertion of control: A business may choose to hire employees if it intends to exert control over the manner in which work will be done and the work tools and equipment to be used for the work. An employee may also be hired if the work needs to be done under thorough supervision, while an independent contract may be hired where the job can be done by a professional that requires little or no supervision.

- Cost of Labour: A business may decide to hire an independent contractor to save cost. Independent contractors are not entitled to employment benefits such as insurance, retirement benefits, allowances, bonuses and other employment benefits. Conversely, they are only paid a set rate and even provide their own work tools. This will save a lot of cost for businesses.

About the Author

Vivian Umelue is an attorney and legal templates programmer at Wonder.Legal and is based in Nigeria.

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