Employee Misclassification: What Is the Difference Between Independent Contractors and Permanent Employees?

The world is changing. In the last period, we’ve been witnessing a gradual global shift in workforce structure from permanent employees towards contractual workers or freelancers. While the priority of full-time employees was already decreasing, the current pandemic appears to be a catalyst to this change.

Increasingly, companies are no longer looking for long-term staff for their companies but rather for employees that are available when required and are paid for that time only. Keeping the impact of the pandemic in mind, more enterprises choose freelance or contract-based workers over permanent employees. 

Although employing independent contractors offers substantial benefits, it also exposes your organization to significant risks such as misclassification. This implies the incorrect classification of a worker and can result in penalties, black wages, benefits to the workers, and maybe even back taxes by the government. 

The rights and rules of contractors in sight

In the US permanent employees and independent contractors are treated almost equally by giving them similar rights. However, in most EU-countries, this is not the case. Essentially, if a person is treated as a permanent employee but classified as a contract-based worker, he is void of the various benefits provided in the company such as insurance and pension. This does allow that person to sue your company and ask for such benefits after all. 

With the growing popularity of part-time or freelance workers, countries have started examining the rights and protection of such workers. To avoid risks like misclassification, it is important for enterprises to understand the different types of employment and regularly define the status of their employees.

A person may work as an independent contractor but gradually updating the terms and conditions of employees may lead to treating them as a permanent employee. 

Mentioned below are three broad classifications of employees:

Who should be considered a full-time employee?

Someone is considered a full-time employee if he has an agreement with the organization according to which he has to work at least 35 hours (depending upon the country) per week. For this work, he is entitled to a fixed salary and various benefits such as insurance, paid leaves, bonuses, and more. 

Full-time employees usually enjoy more benefits than freelance or contract-based workers. They often receive

  • Paid sick leaves
  • Pregnancy or maternity leave
  • The minimum wage or higher
  • Emergency leaves
  • Regular increments

Hiring and firing of these employees are also subjected to the laws of a country. For instance, firing full-time employees without any prior notice can lead to serious consequences in the US. 

Part-time employees

A part-time employee is generally also a permanent employee of a company and receives comparable benefits as the full-time employees do. The only difference is that part-timers work fewer hours. Similar to full-time employees, part-timers usually receive similar minimum wages pay, pension, paid leaves, emergency leaves, and more. 

Part-time employment is becoming quite common in many countries as well. The rights of part-time workers vary from country to country though. For instance, in the UK apply separate guidelines for the rights of part-time workers while in Australia, they enjoy exactly the same benefits as their full-time colleagues.

What independent contractors are? 

Independent contractors or freelancers seem to become the new normal regarding workforce structure. Many renowned global companies like Amazon and Uber mostly rely on independent contractors.

These workers are employed by an organization on a contract-basis and enjoy very little benefits compared to full-time or part-time employees. On the other hand, freelancers or contractors do not depend on one single organization and can work for as many companies as they wish at the same time. 

What are the main challenges faced by contractors?

With the growing popularity of these kinds of work structures, the issues faced by contractors or freelancers are also increasing. Mainly, they face a lack of job security as they can be fired at will. In most cases, they also suffer from low wages due to the high availability of such workers in the market and because employers often do not need to meet minimum wages.

By now, more countries come to realize this dilemma and are working towards providing better rights to such workers. For instance, the UK government has created a new classification for contractors and freelancers to provide them with better security and more benefits. 

Employing contractors yourself or through an agency

The employment of independent contractors can be done either directly or indirectly. An organization like yours could partner up with an agency or employ them yourself through your legal entity. Agencies are often able to control the billing of the workers saving you the hassle of doing such hefty tasks. This structure has given rise to a new model of organization handling freelancers. 

For instance, the concept of “portage” companies has been passed in the legislation of France in 2017. These companies can manage the employment of freelance workers along with giving them the liberty to work as a freelancer. They do not manage the day-to-day work but do take care of aspects like payroll, leaves, billing, and other employment benefits. 

Furthermore, organizations can also engage with agencies for their human resource. For instance, in the UK, an independent contractor may act both as a worker and an employee if he is employed through an agency. 

Some countries did introduce several conditions along with such provisions. In Italy for example, the number of contract-based workers cannot exceed more than 1% of the number of permanent employees in an organization. This is to safeguard the rights and jobs of permanent employees. 

Other classifications of workers that exist include:

Apprenticeships: Apprentices are the workers who get on-the-job training. They are treated as a full-time employee, but they are void of any benefits associated with full-time employment. 

Self-employed workers: Self-employed workers are quite similar to independent contractors. Their rights vary from country to country, but they generally exclude minimum wage or paid leaves. 

These three board classifications are standard across many countries, globally. However, the rights enjoyed by a worker belonging to a particular status may differ from country to country. There is a lack of rights available to independent contractors but as they become more and more common, countries have started considering and passing legislation to provide protection to such employees. 

Therefore, an organisation having a global presence must keep itself updated with the changing rules and norms not only in the country where it is headquartered but also in other countries of its employees.