Understanding the Difference Between Employee and Contractor

If your business has workers, understanding the difference between employees and contractors is critical to avoid fines and penalties.

State statute defines employee misclassification as “Avoiding tax liabilities and other obligations imposed by Chapter 95, 96, 97, 105, or 143 of the General Statutes by misclassifying an employee as an independent contractor.”

Misclassification investigations are typically conducted after wage and hour audits, employee/independent contractor complaints, or workers’ compensation claims by an independent contractor.

What Is an Employee?

State and federal laws delineate what constitutes an employee or an independent contractor. The definition goes far beyond W-2s and 1099s.

If any of the following is true, the worker might need to be classified as an employee:

  • The company determines how the worker completes a task.
  • The worker’s duties are consistent with that performed by an employee at the company.
  • The worker cannot hire or fire their own assistants to complete tasks.
  • The company provides equipment to the worker.
  • The worker is under a restrictive contract with provisions like a non-compete clause.

A business cannot exercise much control over how and when the independent contractor completes their work.

Unsure if your business is properly classifying workers? The experienced attorneys at Jetton & Meredith, PLLC can evaluate your specific circumstances to ensure you stay compliant with all applicable laws.

What Is the Employee Fair Compensation Act (EFCA)?

In the fiscal year 2021-22, the Criminal Investigations and Employee Classification Division of the North Carolina Industrial Commission initiated more the 7,400 investigations into possible violations of the Workers’ Compensation Act and the Employee Fair Compensation Act (EFCA). The division identified 461 employees who were misclassified as independent contractors.

The EFCA established the Employment Classification Section (ECS). The ECS is statutorily required to coordinate with other state agencies to recover the following from employers who misclassified employees:

  • Back Taxes (state and federal)
  • Wages
  • Benefits
  • Penalties
  • Other Monies Owed

The ECS works closely with the North Carolina Department of Labor, the North Carolina Department of Revenue, and the North Carolina Division of Employment Security, among others. Employers who fail to pay civil assessments or penalties will be referred to the appropriate district attorneys’ offices for prosecution.

Any vendor assessed a civil penalty for violating the EFCA is ineligible to contract with a state government agency within five years of the assessed penalty.

When Was the EFCA Passed?

The EFCA was passed by the North Carolina General Assembly in August 2017 and went into effect on Dec. 31 of that year. The legislation was enacted in response to the widespread intentional misclassification of employees, particularly in the construction industry.

Some employers classified independent contractors erroneously to avoid paying payroll and unemployment taxes. This designation also incorrectly enabled these employers to not be subject to required workers’ compensation insurance.

Independent Contractors are not entitled to the following in North Carolina:

  • Minimum Wage
  • Overtime Pay
  • Vacation Pay
  • Wage/Hour Record-Keeping
  • Other Benefits Enjoyed by Employees

Equal Employment Opportunity Commission (EEOC) laws do not protect independent contractors from discrimination.

Legal Guidance for Worker Classification Compliance

If you have one or more workers, worker classification laws in North Carolina apply to you. Whether inadvertent or willful, misclassification can lead to thousands of dollars owed in back pay, taxes, and penalties.

Our legal team at Jetton & Meredith, PLLC can help businesses of all sizes and industries stay compliant with all necessary laws and regulations, including independent contractor and employee classifications. Contact us online or call (704) 931-5535 to schedule a consultation.