Worker classification is important as it defines almost everything what a person can or cannot do upon signing an agreement to work in your midwifery practice. It also determines your responsibility as an employer in terms of their taxes, social security, the time they should render and other factors that might affect their job.
While this is a very important matter that all business owners especially midwives who practice on their own should know and understand, many are still not aware of the difference between independent contractors and an employee. Most people would probably think that the only difference between the two are how they are being called without even realizing the deeper contrast that lies within the agreement of both parties.
When you hire a person, your first priority as an employer is to determine whether you want a lasting relationship or just for a particular job in a small amount of time. You should know your needs, and your capacity to hire a person. After determining and you already found the perfect person fitted in the job, make sure you don’t forget discussing every piece of information that they should know before they accept your offer.
However, before we dig into deeper understanding of how you can determine the conditions to stipulate in the contract agreement or employment contract, let us first define the difference between an independent contractor and an employee:
According to the United States’ Small Business Association, an employee is defined as someone who “performs duties dictated or controlled by others; is given training for work to be done; and, works for only one employer.”. An “independent contractor,” on the other hand, is someone who operates under a business name or under his own name, may have his own employees, may maintain a separate business checking account, may advertise his business’ services, invoices for work completed, has more than one client, has his own tools and sets his own hours, and keeps business records. The IRS defines a person as an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
An independent contractor is a person who works autonomously rather than for an employee. They have much autonomy with their job, the time they can render, the flexibility and such. Although a contractor and employee may have quite similar task, there are significant differences in terms of legalities, therefore it is important to follow the law with regards to taxes, benefits, payments and the likes. While an employee will not have much control over the type of work they will do. Nevertheless, they will have the benefits and the permanence of a full-time job. Health care is often the most desirable benefit.
Both contract has advantages and disadvantages, therefore as a midwife who plans to pursue her own midwifery practice, you should take time to study the difference between the two contract. Especially for an independent contractor, your agreement should be really stressing their status with your practice. We don’t want any business owner to be liable for their back taxes that the independent contractor was supposed to submit as being 1099 and thinks you treated them like an employee versus independent contractors.
Here are the Top Differences Between Employees and Independent Contractors
Particularly, an employee performs work under the direction and control of their employer. They are “micromanaged “by their boss. The employer determines the hours, work location and how work is done. While the independent contractors run their own time and do not follow certain direction from anyone aside from what are stipulated in the contract agreement.
The issue of withholding taxes is critical to the contrast. It is the responsibility of the employer to withhold an employee’s federal and state income taxes. The employer is also required pay the withheld taxes to the IRS and any applicable state agencies. People working as independent contractors, on the other hand, must pay their own income taxes and the employers (in most cases) need not withhold taxes.
Social Security and Unemployment
Another distinction between employees and independent contractors concerns Social Security and unemployment insurance. In most cases, employers are required to make payments into Social Security and unemployment insurance on behalf of employees. While, independent contractors make their own contributions to Social Security. An employer also need not purchase unemployment insurance for independent contractors because the independent contractor is viewed as self-employed.
Healthcare and Retirement Benefits
When employers offer certain retirement plans, those employers must make the retirement accounts available to all employees. Unlike employees, independent contractors are not due any sort of contribution toward a retirement plan or account. Other fringe benefits, such as health care coverage, vacation time, and sick leave are similar to retirement plans. These benefits are available to employees under myriads of federal laws and regulations, but not to independent contractors.
The current patchwork of laws across the United States makes it difficult for individuals and potential employers to differentiate between independent contractors and employees. Clarifying this confusion is important because of the harm mistakes may inflict on both workers and employers.
Some of the harms that can be caused by incorrect classification include:
- 1. Employees may lose employment benefits such as health insurance, sick days, overtime, and retirement benefits if incorrectly classified
- 2. Employees and prospective employees may lose protections afforded under occupational safety laws and anti-discrimination safeguards
- 3. Competing businesses and taxpayers may be forced to pay, for example, emergency medical costs or welfare for uninsured employees who, by right, should have been covered under employer health insurance plans or unemployment insurance.
Misclassification also has legal punitive consequences for employers under both federal and state law. First, if an employer misclassified an individual as an independent contractor instead of employee the employer may be required to reimburse the employee for wages that should have been paid under the Fair Labor Standards Act, including overtime and minimum wage. Second, an employer will have to pay back taxes and penalties for federal and state income tax withholding that should have been paid to the government. Third, an employer can be required to make Social Security and Medicare payments that should have been made. Fourth, the employer will have to provide the incorrectly classified individual with employee benefits such as health insurance and retirement benefits. Finally, many states now impose criminal penalties such as jail time and fines upon a business that intentionally misclassifies an individual as an independent contractor.
Unlike traditional employees whose jobs may encompass a wide variety of duties and tasks, independent contractors are only responsible for performing the services outlined in a contract or Scope of Work (SOW).
A clear SOW provides the foundation for a good working relationship, outlining the expectations of both parties. It should include details about the work to be done, a time frame, a process for managing changes, and payment terms.
Rather than working for a specific salary, independent contractors submit invoices for their work. Pay and payment terms should be discussed during initial contract negotiations. Independent contractors may have a standard billing rate for their services, or their rate may vary depending on the type of work you are looking for. Be sure to discuss how and when you’d like the contractor to invoice you for work completed, as well as how and when you will pay them after receiving an invoice.
Because independent contractors are their own business entity, a client cannot determine their work hours. They alone are responsible for fulfilling the work agreement—when they work and the hours they keep are completely up to them.
There are many financial benefits to engaging independent contractors, including not having to provide traditional benefits such as health insurance, stock options, or retirement plans.
Understanding the legal side
Independents also do not receive the same legal protections—unemployment, anti-discrimination, and Workers’ Compensation—as employees. Nevertheless, it is good practice to ensure independent contractors have basic insurance requirements built into their contract to protect against any legal issues.
Now that you have the glimpse of the difference between an independent contractor and an employee, determine your midwifery needs, do you need someone that follows every bit of your direction to get things done or do you want someone who gets the work done without any supervision? Do you have the capacity to pay all the benefits and taxes for your employee or pay an extra amount to your independent contractor instead? We have attached on the link below some great resources for your sample midwife employment contract and sample independent contract agreement. Also, don’t hesitate to seek legal advice before you make a decision, it’s a great step to do.
Sample Midwife Employment Contract
Sample Independent Contract Agreement