An employer is an entity that hires an individual to perform services. While this seems straightforward, the legal definition is specific and carries significant implications for both the business and the worker. Understanding this classification is important for business management, as it dictates legal responsibilities, tax obligations, and the nature of the relationship between the party paying for the work and the one performing it.
The Legal Definition of an Employer
The legal definition of an employer hinges on the “right to control.” An entity is considered an employer if it has the legal right to direct and control not only the final result of the work but also the details of how that work is accomplished. This principle is used by government bodies like the Internal Revenue Service (IRS) and the Department of Labor to determine the nature of a working relationship.
The key is the right to control, not whether that control is exercised daily. An employer might not provide constant, direct supervision over a skilled worker, but if they retain the authority to dictate the methods, tools, or sequence of the work, an employer-employee relationship likely exists. This concept separates a true employment relationship from other business arrangements where a party might pay for a service without controlling the means of its execution.
Distinguishing Employers from Clients
A common point of confusion is differentiating between an employer, who engages an employee, and a client, who hires an independent contractor. Courts and government agencies examine the total relationship, focusing on three main categories to apply the “right to control” principle. No single factor is decisive; instead, all factors are weighed to form a complete picture of the work arrangement.
Behavioral Control
This category considers if the business has the right to direct and control how the worker performs the specific tasks they were hired for. This includes the level of instruction provided. For example, requiring a worker to attend specific training, follow a set schedule, or perform tasks in a particular order points toward an employment relationship. A client hiring an independent contractor specifies the desired outcome but leaves the methods for achieving that result to the contractor’s discretion.
Financial Control
Financial control focuses on who directs the economic aspects of the worker’s job. Factors include how the worker is paid; employees receive a regular wage, while contractors are paid a flat fee per project. It also considers who provides the tools, equipment, and supplies. When the business furnishes these items, it suggests an employer-employee dynamic, whereas contractors invest in their own equipment. Employees are reimbursed for business-related expenses, while contractors build such costs into their fees.
Type of Relationship
The way the two parties perceive their relationship is also considered. A written contract describing the relationship as one of an independent contractor is a factor, though it is not controlling if the reality of the situation suggests otherwise. Providing employee-type benefits, such as health insurance, paid time off, or a pension plan, indicates an employment relationship, as these are not offered to independent contractors. The permanency of the relationship is also a factor; employment is viewed as ongoing and indefinite, whereas a contractor’s services are retained for a specific project or period.
Key Responsibilities of an Employer
Being classified as an employer carries a host of legal and financial obligations. These duties, mandated by federal and state laws, are the primary reason the distinction between an employee and an independent contractor is so meaningful for a business. Some primary responsibilities include:
- Managing payroll taxes by withholding federal income, Social Security, and Medicare taxes from wages and remitting these funds with the employer’s matching contribution. Employers must also pay federal and state unemployment taxes.
- Complying with wage and hour laws, like the federal Fair Labor Standards Act (FLSA), which sets rules for minimum wage and overtime pay. Employers must also follow state-specific regulations.
- Providing workers’ compensation insurance to cover medical costs and lost wages for employees injured on the job.
- Adhering to the Occupational Safety and Health Act (OSHA) by providing a workplace free from recognized hazards that could cause serious harm or death.
Understanding Different Types of Employers
An employer is not defined by its business structure, as various legal entities can assume this role. The most common forms of business, including sole proprietorships, partnerships, limited liability companies (LLCs), and corporations, can all be employers. A sole proprietor becomes an employer the moment they hire their first employee, and larger entities like corporations are legally separate from their owners and act as the employer for their workforce.
Government agencies at the federal, state, and local levels are also employers. Another arrangement is “joint employment,” which arises when two or more businesses share control over and are jointly responsible for an employee. For instance, a temporary staffing agency and its client company may both be considered employers of a temp worker, sharing legal accountability for that worker’s rights and protections.