Employee vs Independent contractor

When Mr X got hired, he was excited about his new job but the person who hired him called him something he did not quite understand. That’s “An independent contractor.” What does this mean? What are the effects? Does an independent contractor have the same rights as an employee?

The importance of defining your status, prior to employment, cannot be overemphasized, as an employee who is misclassified as an independent contractor loses all the rights and privileges of an employee and vice versa.

Who is an independent contractor?

An independent contractor is a self-employed person, that is, a consultant, lawyer, accountant, engineer or any other person who provides services to other organization for a fee. Common law principles further define independent contractor status by method of payment. If a person is on an employer’s payroll and receives a steady pay, clearly that the person is an employee and not an independent contractor.

An independent contractor is free from any control or influence of the client. He can apply his discretion concerning the manner and method of completing the task and whatever the outcome of the task, the independent contractor is responsible for it.

Who is an employee?

An employee is a person who works for the employer on a regular basis, in return for a remuneration called ‘salary’. The terms and conditions of the employment are described under a contract known as a ‘contract of employment’. An employee gives up elements of control and independence, is eligible for certain benefits and works within constraint of workplace.

[Read Also: Guide to Nigerian Pension Fund Contribution]

Why is it important to know a worker’s status? 

The distinction between an employee and an independent contractor is very important. Apart from the fact that there are incentives for employing laboru, an employer must withhold Federal and State income taxes, Social security/Medicare from employees, but not from independent contractors.

If an individual is working as an independent contractor, the “employer” does not make any of these deductions and the independent contractor must pay his or her own taxes along with income tax on earnings.

What are the factors to consider?

Although there is no conclusive evidence, the factors to consider when identifying someone as an employee or an independent contractor are:

  • What is the nature of work? – When work done is considered integral to the business, it is more likely that the person is an employee. On the other hand, work that is temporary and non-integral may imply independent contractor status. For example, a cleaner would not be doing ‘company’ work if he or she were working for a bank.
  • The economic realities test – This test examines the dependence of the worker on the business for which he or she works. If a person gains a large portion of their salary from that business, chances are that person qualifies as an employee. The test also factors in such things as level of skill, integral nature of the work and intent of parties.
  • What is the degree of control over work and who exercises such control? – When the hiring party controls the way work is carried out, the relationship between the parties is employer/employee. If the worker can set his or her own hours and works with little or no direction, he or she is probably an independent contractor.

What is each party’s level of loss in the relationship?

Is there any training? To perform tasks in a defined manner, an employee undergoes requisite trainings. An independent contractor on the other hand does not undergo any training for the provision of services.
Who has paid for materials, tools, supplies and equipment? – An independent contractor uses his own tools and equipment in carrying out a specific project but if the tools are provided by the business, it may imply an employee status.
The absence of a formal employment agreement – The presence of a written employment contract is a strong indication of an employer/employee relationship.
What type of skill is required for work?
Is there a degree of permanence? – An employer/employee relationship has a higher degree of permanence as there is a greater level of job security.

[Read also:Watch your step: These 3 habits are startup killers]

Written employment contract

The presence of a written employment contract is a strong indication of an employer/employee relationship.

Under the Labour Act, an employer must give its employee, a written employment contract, no later than three months after the start of the employment period.

The employment contract must include the following information:

  • the name of the employer or group of employers;
  • the name and address of the employee and the place and date of their engagement;
  • the nature of the employment;
  • if the contract is for a fixed term, the date when the contract expires;
  • the period of notice to be given by a party wishing to terminate the contract; and
  • the rates of wages, their method of calculation, and the manner and periodicity of payment of wages.

Any terms and conditions relating to:

  • working hours;
  • holiday and holiday pay;
  • incapacity to work due to sickness or injury, including any provisions for sick pay; and
  • any special conditions of the contract.

Are there any grants or incentives for employing people?

Labor intensive industries are entitled to tax concessions. Concessionary rates are progressive so that;

  • Industries employing 1,000 persons or more benefit from a 15% tax concession.
  • Industries employing at least 200 persons benefit from a 7% tax concession.
  • Industries employing at least 100 persons benefit from a 6 % tax concession.

Before coming to a decision as to whether to employ a person or hire an independent contractor, you have to realize what the nature of the job is, what are your requirements and expectations? You also have to consider if it saves more money hiring an employee or an independent contractor.

 

1 COMMENT

  1. You wrote that “If an individual is working as an independent contractor, the “employer” does not make any of these deductions and the independent contractor must pay his or her own taxes along with income tax on earnings” This is misleading/an error in the aspect of tax. The “employer” is expected to withhold from whatever remuneration paid to the independent contractor and remit to the RTA. The WHT credit notes received from the RTA will then be used to offset his/her income tax when the need arises.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.