By Weisberg Cummings, P.C. on May 11th, 2021
Independent contractors are workers who are non-employees and perform services for a business. Telling the difference between employees and independent contractors can be difficult, and many factors are considered to distinguish the two. Typically, a worker’s classification as an employee or independent contractor depends on how much control the company has over the worker.
If you are an independent contractor, you may be asked to sign a non-compete agreement or the employer may include a non-compete provision in your employment contract. Though a non-compete clause can vary in its structure, it typically prevents you from starting a competing business or working with a different company for a period of time after your employment ends. Complications can arise with non-compete clauses if you are considered an independent contractor rather than an employee.
Employee vs. Contractor
Under the Internal Revenue Service (IRS), employees and contractors are defined differently. Being correctly classified as an independent contractor or an employee is crucial for tax purposes.
What Are the Differences Between Employees and Contractors?
Your employer should examine the relationship between you and the company to classify you as either an employee or an independent contractor. Your worker classification determines whether your employer must:
- Withhold income taxes
- Withhold Medicare taxes
- Pay Social Security
- Pay unemployment taxes for wages paid to employees
Typically, businesses are not required to withhold taxes on payments made to independent contractors. The earnings of an independent contractor are instead subject to self-employment tax. Generally, you will be considered an independent contractor if your payer can control or direct the result of your work but does not control what will be done or how the work will be done.
How Are Workers Classified?
Employers use three categories to determine whether a worker is an employee or an independent contractor:
- Financial control: One of the aspects that employers consider when classifying a worker is how much financial control the employer has over the worker. If a business has the right to control or direct the business and financial aspects of a worker’s job, then the worker may be considered an employee.
- Behavioral control: Another one of the aspects employers consider when classifying a worker is how much behavioral control the employer has over the worker. When the company has the right to control and direct the work that the worker performs, he or she is considered an employee.
- Relationship between the employer and worker: The type of relationship that exists between the employer and the worker also factors into how a worker is classified. The written contract, benefits provided by the company, permanency of the relationship and the services the worker performs all inform the relationship between the employer and worker.
What Happens if a Worker Is Misclassified as an Independent Contractor?
If a business misclassifies an employee as an independent contractor, the employer may be liable for employment taxes. On the other hand, if an employer provides a reasonable basis for not classifying a worker as an employee, the requirement of paying employment taxes may be avoided.
Employers can receive help from the IRS in determining the status of workers through the use of Form SS-8. If you are a worker who believes your employer may have improperly classified you as an independent contractor, you can use Form 8919. This form will help you calculate and report your share of uncollected Medicare taxes and Social Security due on your compensation.
Non-Compete Clauses for Independent Contractors
Non-compete clauses are beneficial to businesses that invest considerable effort and time into training employees. If you have been classified as an independent contractor, you may be facing a non-compete agreement or an employment contract with non-compete clauses.
What Is a Non-Compete Agreement?
Non-compete agreements are contracts between employers and workers in which workers agree not to compete with the employer during or following employment, usually for a certain amount of time. This legal contract prevents an employee from working for a competitor or starting his or her own business that competes with the employer.
An employer may also ask you to sign a non-compete agreement as a way to prevent former employees from revealing sensitive information or secrets about operations, customers, clients, strategy, pricing, formulas, ideas, methods, practices, salary, public relations, future products or marketing plans.
How Does a Non-Compete Agreement Work?
A non-compete agreement should be equitable and fair to both parties. To be considered enforceable, a non-compete agreement must include:
- A reason to enact the non-compete agreement
- The location the agreement covers
- A date on which the non-compete agreement begins
- How the worker will be compensated for agreeing to the agreement’s terms
- The specific dates during which the worker cannot work in a competitive sense
After employment ends, non-compete agreements are usually in effect for a certain length of time. A non-compete agreement must contain a realistic timeline and cannot permanently bar you from furthering your career in the field.
Is a Non-Compete Clause Enforceable?
For an independent contractor, non-compete clauses could reclassify you as an employee. A non-compete for contractors can actually be an important factor in determining whether a worker is truly an employee rather than a contractor. If an independent contractor is reclassified as an employee, the company could be subjected to penalties, workers compensation insurance and overtime pay.
Even if you remain classified as a contractor, a non-compete clause may not be enforceable. Independent contractors are expected to be experts in their chosen field and are likely working for multiple companies at once. If one company attempts to enforce a non-compete clause, your ability to find work may be affected. If a non-compete clause unreasonably restrains your ability to work, most courts in the U.S. will not enforce it.
Schedule a Free Consultation With Weisberg Cummings, P.C.
Contract disputes arise regularly over the classification of employees, overtime hours and independent contractors. An issue with your contract can interfere with your rights or your compensation. An experienced lawyer can help you resolve contract issues and recover the compensation you deserve.
The employment lawyers at Weisberg Cummings, P.C. are here to assist individuals and families throughout the state of Pennsylvania. We provide personalized, thoughtful service and will learn as much as possible about your goals and circumstances. Combined, our lawyers have more than four decades of experience, and we prove our dedication to our clients by returning emails and phone calls promptly.
If you believe you have a contract dispute, contact us today to schedule a free consultation with one of our attorneys.