Why the Distinction Matters
Whether someone works for you as an employee or an independent contractor determines:
- Who pays payroll taxes (employer vs. contractor)
- Whether they qualify for benefits (health insurance, retirement, paid leave)
- Whether you can be held liable for their actions
- Whether non-compete and IP assignment clauses are enforceable
- Whether employment laws (minimum wage, overtime, anti-discrimination) apply
Misclassifying an employee as a contractor is a serious legal and tax risk. The IRS and Department of Labor have specific tests for determining worker status.
Employment Contracts
An employment contract governs a formal employer-employee relationship. Key characteristics:
**Control**: The employer controls both the result AND the manner/means of work. The employee works set hours, uses company equipment, and follows company procedures.
**Documents typically include**: - Job title and description - Compensation (salary or hourly wage) - Benefits - Work location and hours - At-will vs. for-cause termination terms - Non-compete and non-solicitation clauses - IP assignment agreement (all work created on company time belongs to the employer) - Confidentiality provisions
**Tax implications**: Employer withholds income tax and FICA (Social Security and Medicare) from each paycheck. Employer also pays the employer portion of FICA.
Freelance (Independent Contractor) Contracts
A freelance contract governs a relationship between a business and an independent contractor who performs specific services. Key characteristics:
**Control**: The contractor controls HOW the work is done. The client specifies the result but not the method. The contractor typically uses their own equipment and can work for other clients simultaneously.
**Documents typically include**: - Scope of work and deliverables - Fees and payment schedule - Project timeline - IP ownership (who owns the work product) - Confidentiality and NDA terms - Kill fee for cancellation - Independent contractor status clause (explicitly stating the relationship is not employment)
**Tax implications**: The contractor pays self-employment tax (15.3%) and is responsible for their own tax filings. The client issues a 1099-NEC for payments over $600.
The ABC Test (California and Other States)
California's AB5 (2019) created a strict "ABC test" for classifying workers:
A: The worker is free from control in performing the work B: The work is outside the usual course of the hiring entity's business C: The worker is customarily engaged in an independently established trade
If all three aren't met, the worker is presumed to be an employee. Other states have adopted similar tests.
Generate Your Freelance Contract
TermsDock's Freelance Contract Generator creates independent contractor agreements with all standard clauses, including explicit contractor status language.