TL;DR
- An independent contractor, or independent worker, is a person or company that supplies services to another business under a contract, rather than as its employee. They run their own business, decide how the work is done and carry the risk.
- In the United States the IRS's general rule is that a person is an independent contractor if the payer controls only the result of the work, not what will be done and how. In the UK, GOV.UK lists indicators of self-employment such as bidding for work, invoicing and working without direct supervision, and warns that tax status and employment status can differ.
- Contractors have fewer rights and more responsibilities than employees. Misclassifying an employee as a contractor is the common mistake, and it falls on the business, so decide the status from the facts of the work, not the label on the contract.
The same person can be an employee on Monday and an independent contractor on Tuesday, doing the same work for the same money, depending on who controls how the work is done and who carries the risk. Businesses get this wrong often, usually in the direction that costs them least in the short term and most in the long term.
This article gives the meaning of independent contractor, and of the newer phrase independent worker, explains how the United States and the United Kingdom decide who is one, sets out what each side gains and gives up, and shows how to avoid the misclassification that regulators on both sides of the Atlantic look for.
Contractors and employees often sit in the same team and need the same clarity about what is expected. See how New Dynamics Goals & OKRs keep targets and progress in one place, for the people you employ and the people you engage.
What is an independent contractor?
The Cambridge Dictionary defines an independent contractor, in its tax and law sense, as “a person or company that supplies goods or services to another company”. The key word is independent: the contractor works for the client under a contract for services, not under a contract of employment.
Independent worker is a broader and newer phrase, used for anyone who earns a living outside conventional employment: freelancers, consultants, sole traders, gig and platform workers, and contractors trading through their own companies. It has no fixed legal meaning. In law, what matters is whether the person is an employee, a worker or self-employed, and the tests for that are set by each country.
Three features mark an independent contractor out in practice.
- They run a business. They find clients, set or negotiate prices and can work for more than one client.
- They control the how. The client says what result it wants; the contractor decides how to achieve it.
- They carry the risk. They are paid for the outcome, cover their own costs and can lose money on a job.
How the United States decides: the IRS test
The Internal Revenue Service's page independent contractor defined gives the general rule: “The general rule is that an individual is an independent contractor if the person for whom the services are performed 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.” It adds: “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done).”
The IRS's page on independent contractor, self-employed or employee groups the evidence of control and independence into three categories.
- Behavioral. Does the company control, or have the right to control, what the worker does and how the worker does the job?
- Financial. Are the business aspects of the worker's job controlled by the payer, such as how the worker is paid, whether expenses are reimbursed and who provides tools and supplies?
- Type of relationship. Are there written contracts or employee-type benefits, such as a pension plan, insurance or vacation pay? Is the relationship expected to continue, and is the work a key aspect of the business?
The IRS is clear that what matters is the legal right to control the details of how the services are performed, not whether that right is exercised. State law, and the tests used by other US agencies, can differ from the IRS's. This is general information, not legal or tax advice.
How the United Kingdom decides: three statuses
The UK has three employment statuses rather than two. Acas, the public body that advises on workplace relations, explains in its guidance on employment status that there are three main types of employment status, employee, worker and self-employed, all defined by law, and that “Employment status for tax purposes is different from employment status for employment rights purposes.”
GOV.UK's guide to self-employed and contractor status says: “A person is self-employed if they run their business for themselves and take responsibility for its success or failure.” It lists indicators. Someone is probably self-employed if they are self-employed for tax purposes and most of the following are true:
- they put in bids or give quotes to get work;
- they are not under direct supervision when working;
- they submit invoices for the work they have done;
- they are responsible for paying their own National Insurance and tax;
- they do not get holiday or sick pay when they are not working;
- they operate under a contract, such as a contract for services or consultancy agreement, that uses terms like self-employed, consultant or independent contractor.
GOV.UK adds that a contractor can be self-employed, can have the employment status of a worker, or can be an employee if they work for a client and are employed by an agency, and it points to the off-payroll working rules, known as IR35, for contractors working through their own companies. The label in the contract is only one indicator of six, and HMRC and the courts look at the facts.
What each side gains and gives up
| Question | Employee | Independent contractor |
|---|---|---|
| Who controls how the work is done | The employer | The contractor |
| Who pays tax and social contributions at source | The employer, through payroll | The contractor, through their own returns |
| Paid holiday, sick pay, pension enrolment | Yes, as the law provides | No, unless the contract says so |
| Protection from unfair dismissal | Yes, subject to conditions | No; the contract governs |
| Tools, training, expenses | Usually provided | Usually the contractor's own |
| Can work for others | Usually restricted | Yes |
| Can send a substitute | No | Often yes |
GOV.UK notes that self-employed people in the UK still have protection of their health and safety and, in some cases, protection against discrimination, along with whatever rights the contract gives them. Our guide to payroll explains how employees are paid through PAYE, which contractors are not.
Misclassification: the common mistake
Treating an employee as an independent contractor saves the business payroll costs and obligations, until it is found out. The signs that a contractor is really an employee are the same in both countries: the business sets the hours, supervises the work, provides the equipment, pays a regular wage regardless of results, restricts other work and expects the relationship to continue indefinitely.
Four habits reduce the risk.
- Decide status from the work, not the paperwork. A contract for services signed by someone who works like an employee does not make them a contractor.
- Write the contract to match reality. If the person genuinely controls the how, can substitute and carries risk, say so, and behave that way.
- Review long engagements. A contractor who has worked full-time for one client for three years, on the client's equipment, under the client's supervision, has drifted.
- Use the official guidance. GOV.UK and the IRS both publish status guidance, and both point to further help where a case is unclear. Take advice before relying on a label.
Our guide to exempt vs non-exempt employees covers the other classification that US employers get wrong.
Frequently asked questions
What is an independent worker?
Independent worker is a broad phrase for anyone who earns a living outside conventional employment: freelancers, consultants, sole traders, gig and platform workers and contractors trading through their own companies. It has no fixed legal meaning; in law the question is whether the person is an employee, a worker or self-employed.
What is the difference between an independent contractor and an employee?
An employee works under the employer's control, is paid through payroll and has employment rights such as paid holiday and protection from unfair dismissal. An independent contractor runs their own business, controls how the work is done, carries the financial risk, pays their own tax and has only the rights the contract gives them.
How does the IRS decide if someone is an independent contractor?
The IRS's general rule is that a person is an independent contractor if the payer has the right to control only the result of the work, not what will be done and how. It weighs evidence in three categories: behavioral control, financial control and the type of relationship.
How does the UK decide if someone is self-employed?
GOV.UK says a person is self-employed if they run their business for themselves and take responsibility for its success or failure, and lists indicators such as bidding for work, working without direct supervision, invoicing, paying their own tax and National Insurance, getting no holiday or sick pay and working under a contract for services. Tax status and employment status can differ.
Can an independent contractor work for more than one client?
Yes, and being free to do so is one of the marks of genuine self-employment. A contractor who is restricted to one client, works set hours under supervision and is paid a regular wage is likely to be an employee in substance, whatever the contract says.
What happens if a business misclassifies an employee as a contractor?
The business may become liable for the tax, social contributions and employment rights it should have provided, with interest and penalties depending on the country. The risk falls on the business, which is why status should be decided from the facts of the work.
Your next step
List every contractor you have engaged for more than a year and answer three questions for each: who controls how the work is done, can they send a substitute, and do they work for anyone else? A "no" to all three is a conversation to have this month.
For clear written terms that separate employees from the people you engage, read and download our employee handbook guide. The guide is free to read, and the PDF uses our short download form.
Want employees and contractors working to the same clear goals? Book a New Dynamics demo and bring your current approach. You can also email contact@new-dynamics.com.
