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Who Are You? What is an Independent Contractor, How is it Different than an Employee, and Why Does it Matter?

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The winds, they are a changin….

In the Gig Economy, the big topic of debate is: Employee or Independent Contractor. This is especially true in California where legislation (known as AB5) is set for hearings that will better define what an Independent Contractor is.

Do NOT sign on for any Gig Apps until you completely understand what it means to be an Independent Contractor.

If you are thinking at all about doing delivery work for companies like Grubhub, Uber Eats, Doordash, Postmates, and others, or Ride Share like Uber and Lyft, or other gig economy options that require you be an independent contractor, do not sign on until you are completely aware of what that means. There are major differences between being self employed (another way of phrasing the independent contractor thing) and being an employee.

31 Day Courier MBA: Day 2

This is the first of 30 business principles we'll be covering in the 31 Day Courier MBA series. It's part of the business plan portion – laying the foundation of who you are and what you are doing. We really need to start with the laying a foundation FOR that foundation – and that is understanding exactly who we are.

The Difference Between an Independent Contractor and an Employee in a Nutshell

It really boils down to this: If you need to pay to have someone do work for you, you can do one of two things: You can get an individual to do the work for you, or you can hire a business. My car needs some work and I don't trust myself to do it well, so I can get my buddy Dave across the street to do it for a few bucks and a six pack, or I can take it in to Jim's Garage.

It's the same for a business. They can either hire an individual or hire a business. Except now there's a bit more regulation around it. When you're a business having the work done for you, if it's an individual doing it for you, it's an employee. If it's a business doing it for you, it's a contractor.

There really is no in between. If you are an individual doing the work as an individual but not on payroll, like we are in the gig economy, if you're not an employee you are a contractor. Bottom line is, legally you are doing the work as a business. In other words, if you ‘re not an employee you are a business.

Why is it even important whether you are an employee or contractor? Isn't it all just the same?

As far as a lot of contractors are concerned, there really doesn't seem to be much of a difference. I work, I get paid. It doesn't matter to me what I'm called as long as the money is coming in.

But the whole reason there is any distinction at all is that for so long, employers have abused the employee relationship to the point that protections needed to be added. If you need your windows clean or you want to outsource some book keeping, or you need an IT company, it's silly to put a business on payroll. When it's all said and done, it doesn't really matter if the company you hire is a Fortune 500 corporation or a sole proprietor that hung a shingle out, you're hiring a business.

Somewhere along the line, someone saw a loophole in all this. They thought, hey, I can avoid all extra stuff that I pay out for employees and just call my people independent contractors, not employees. Welcome to the world of exploitation by Independent Contractor.

In time, those responsible for watching this kind of thing catch on and put rules into place. Yes, you can use independent contractors, in some instances, but you cannot treat them as employees. If you are saying they are a business, you have to give them the freedom to act as a business.

Comparing employment to contracting

It is the balance and tension between freedom and independence that goes with contractor status, and the protections of employment that makes this so fascinating. Unfortunately in the Gig Economy, companies that take advantage of that tension. They appeal to the independence to sign people up, but don't allow true freedom. As independent contractors, we need to understand the differences.

What are the benefits of being an employee?

If you are an employee, there are a lot of protections and guarantees that go with your employment.

  • Minimum wage
  • Overtime pay where the pay rate is higher when you work more than 40 hours
  • Family or Medical Leave – you cannot lose your position if you have to take time off for certain personal or medical reasons
  • Workers compensation – the employer is responsible for costs related to injuries that happen while on the job
  • Unemployment insurance – the company has to pay insurance premiums to make sure you can receive unemployment payments if your job is downsized or eliminated
  • Health and disability insurance (companies may or may not have to provide benefits here depending on size of company, full time status, location, etc)
  • Reimbursement of work related expenses (the requirements here vary by state).

There is a sort of exchange for receiving all these protections and benefits. In return, a company has more right to control how, when and where you work during the time you are being paid. They can set your schedule, set your tasks and tell you what you will be doing, even controlling HOW you do it.

What are the benefits of being a contractor?

Basically, being classified as an independent contractor means you are now operating your own business. That comes with the freedoms that are part of running your own business. You:

  • Get to set your own schedule
  • Choose when, where and how you work
  • Have the right to work for whoever you work for, meaning you can contract your work for multiple organizations
  • (shouls) have the right to set your own prices
  • Cannot be controlled or supervised by companies you perform work for. Your obligation to them is only to complete the work you contracted to do (and as a delivery contractor, that obligation only begins at the acceptance of an order and ends with the successful delivery of the order).

What are the risks of being a contractor?

Here's the bottom line when you own a business: There are no guarantees. You can start up a restaurant or a consulting business or a delivery contracting business and there is no guarantee you will make money. There is no minimum wage. You get no overtime. There is no holiday pay. All you earn is the money you receive based on the work you do under your contract. There are no protections beyond that.

You also are completely on your own as far as your expenses, taxes, insurance and liability. It is up to you to provide what you need to accomplish the work you contracted to do, and to pay for that. You have to provide your own insurance, and it is on you to understand whether or not your insurance actually covers you. You pay self employment taxes, do your own withholding.

Which is Better?

Both.

Neither.

It really depends on you. It really comes down to which you prefer.

Unfortunately Gig companies do not do a good job explaining what it means to be an independent contractor. They stress the freedom but don't touch on the risk. Gig companies don't explain that you can end up spending more on your car than what you are earning. They don't explain that you can get in HUGE trouble by not paying attention to taxes. They just say hey, you're a contractor, you're on your own baby.

I came into this well aware of the risks. I've run my own business before. To me, the freedom and flexibility and greater opportunity that go with the independence are worth more than the risk.

But this is why this is the very first principle you need to look at as an independent contractor – to understand exactly what this is. You need to know you ARE at risk. Understand thatyou HAVE no guarantees. You need to be in this with eyes wide open.

And for you, if the risks are greater than the reward, you really need to look at doing something else. Either that or hope that 1- legislation like AB5 in California changes the story, and 2- That companies continue to offer delivery options if and when they are forced to bring drivers on as employees.

But here's the deal: YOU have to choose. You have to understand exactly what it means to be a contractor. It's on you to understand you have no guaranteesto make the choice – is this where I should be?

Before you go much further, as a driver and contractor, or going further with this series of posts, you gotta search your soul. Is it worth it? Are you willing to make that trade? Are the opportunities out there greater than the risks? That's why it all starts with understanding who you are and what it is to be an independent contractor.

If you're still in, that's what I'm here for: To help you take advantage of that role, take control, and apply ideas and tactics that businesses use to make this successful for you. To help YOU be the boss.

Come Back Tomorrow: Episode 3 of the 31 Day Courier MBA: Your Mission Statement.

Comment Question: What is the greatest benefit for you in being an independent contractor, and why? What risk scares you the most?

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