Warehouse manager explains schedule to three employees
Temporary and contract workers can add value to your organization, but misclassifying a worker as the wrong type can land you in legal trouble. — Getty Images/ alvarez

Temporary employees and contract workers fulfill short-term business needs. A temporary worker is your employee or an employee of a staffing agency, whereas an independent contractor is a business entity, such as a sole proprietor or limited liability company (LLC). Temporary and contract workers can add value to your organization, but misclassification can land you in legal trouble.

Understanding the distinctions and knowing when to hire one or the other can help your company avoid legal issues or an unexpected tax burden. Below we'll go through the definitions and differences between temporary and independent workers.

Temporary and contract worker definitions

Temporary workers are employees of your company or a staffing agency. They're at-will workers or under a contract and paid hourly wages, or, in some cases, a salary. Temporary employees can be part-time, full-time or seasonal. Typically, temporary staff members work under 1,000 hours or one year for your company. You or the staffing firm verifies timesheets, pays the employee, files payroll taxes and sends a W-2 form.

In comparison, independent contractors are self-employed. They may also be referred to as freelancers, contract workers, independent consultants or gig workers. You don't pay payroll taxes or count them as employees for governmental reasons, such as the employee threshold for the Family Medical Leave Act (FMLA). If your company pays $600 or more to a freelancer, you must provide them with a 1099-NEC form.

Typically, temporary staff members work under 1,000 hours or one year for your company. You or the staffing firm verifies timesheets, pays the employee, files payroll taxes and sends a W-2 form.

Key differences between temporary workers and independent contractors

Contract workers and temporary employees may complete similar tasks and work on or offsite; however, several differences exist.

Here's how temporary employees and contractors compare:

  • Relationship: Temporary workers are employees of your company or a staffing firm. In contrast, independent contractors are not employees. You're partnering with another business.
  • Benefits: Temporary employees may qualify for benefits, whereas companies may provide different perks for freelancers.
  • Wages: Temporary workers receive an hourly wage, whereas businesses may pay contractors hourly or flat fees.
  • Work habits: Your company controls how and when temporary employees work, whereas you oversee the final product of a contract worker.
  • Expenses: Companies supply temporary workers with the tools required for their job. Contractors have their own.

[Read more: W-2 vs. 1099 Contractors: Tax Differences Explained]

Examples for hiring independent contractors vs. temporary employees

A retailer or manufacturer may use temporary and contract workers. Staffing firms provide seasonal staff, or companies can hire temporary workers directly. In each case, the temporary employee does work related to core business functions, such as running cash registers or producing products. The temporary worker has a schedule and generally receives direct supervision during the shift.

Retailers choose independent contractors to perform non-core business tasks, such as marketing, maintenance or accounting. If a pipe breaks, your computer gets hacked, or your office needs cleaning, a contractor can step in and solve your problem. In contrast, you need a temporary employee if you're hiring extra help to stock shelves during the holidays.

Sometimes it's tough to make a distinction. For example, you can hire a virtual assistant as an employee or independent contractor. Review the various federal, state and local guidelines, contact your state labor office or talk to your tax advisor for clarity.

[Read more: Startup 2021: 7 Business Tasks You Can Outsource]

Legal considerations for contract and temporary staffing

Navigating employment law is challenging because regulatory organizations apply different standards. The U.S. Department of Labor's Wage and Hour Division (WHD) oversees labor laws, such as the Fair Labor Standards Act (FLSA). The "economic realities" test is used to determine if workers are covered under the FLSA.

The Internal Revenue Service (IRS) uses a Common Law Test to classify workers based on behavioral control, financial control and the parties' relationship. State laws, such as the ABC test in California, also affect the definition of employees and contractors.

According to the Society for Human Resource Management (SHRM), "control is a main determinant in misclassification legal cases." Misclassification affects workers and your company, therefore, it's vital to document how you determined a worker's status.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published January 25, 2022