The distinctions between agents, employees, and independent contractors are not easily understood or defined, and this topic has been the subject of many lawsuits. In the principal-agent relationship, the agent is hired by the principal to act on behalf of the principal and is subject to the control and consent of the principal, usually in return for financial compensation. The agent is responsible for carrying out the wishes of the principal. The principal is responsible for compensating the agent for the work. The agency relationship can be set for a specific time or purpose, but it is not necessarily treated as an employer-employee ongoing relationship.
In the employer-employee relationship, the employer is the person or company that hires others to work in return for salary, wages, or other forms of compensation and has control over the employee's physical conduct. The employer determines the details of the performance of the employee. This is a form of the general principal-agent relationship, but the level of control and monitoring of activities is more than it would be in a regular agency relationship. The employer pays the employee in regular pay periods, or increments, and sets expectations or a description of duties for the employee. The relationship between employer and employee tends to last longer than regular agency relationships do.Agent, Employee, and Independent Contractor Relationships
| Principal-agent | Principal hires agent to provide services or otherwise act on principal’s behalf; principal controls how the agent does the work |
| Employer-employee | Employer hires employee for regular ongoing compensation; employer controls how the employee does the work |
| Principal-independent contractor | Principal hires independent contractor for a particular task; independent contractor controls how they do the work |
Differences exist between the three primary worker relationships of agent, employee, and independent contractor. All three serve different functions and should be designated appropriately to avoid potential conflict and liabilities.
Probably the most difficult concept to understand is that of the independent contractor, a person or business that provides goods, services, or other tasks to a party that does not control the manner in which those items are provided. A key difference has to do with the issue of control. The independent contractor is subject to oversight by the employer, but they are not subject to the same level of control as a typical employee would be. Another differentiation from agents is that independent contractors are not required to act in the best interests of their clients, whereas agents must always act in the best interest of their principals. Independent-contractor relationships are usually considered short-term or temporary.
Courts look to the relationship to determine who was in control, how the control was exercised, and the understanding of the person who is either the employee, agent, or independent contractor. The actions and understandings, as well as the intentions, are all considered relevant in determining the true classification of the person. Agents act on behalf of a principal subject to their control; employees are agents that are subject to a higher degree of control by the principal; and independent contractors are typically not agents, as they have control over the manner in which they do a task.
Employee versus Independent Contractor
| Employee | Independent Contractor |
|---|---|
| Benefits such as health insurance and vacation time are often included | No benefits included |
| Usually works for one employer full-time | Often works for more than one principal |
| Provides regular, ongoing services | Provides services specified in a contract or other agreement |
| Receives regular, ongoing pay | May receive pay by the piece or by the hour for a specific task |
Employees and independent contractors can appear to be the same, but there are distinct differences between them that are recognized by the courts and other federal entities.