CONTRACT LABOR: Definition, Law, Agreement & Difference

Contract Labor

According to the Bureau of Labor Statistics, independent contractors made up a staggering 6.9% of the American workforce in May of 2018 — and that doesn’t even include on-call and temporary workers, who account for around another 3% of the alternative worker statistic. These statistics demonstrate that businesses around the country are implementing a blended workforce strategy to diversify their workforce and support their staffing strategies. It’s a move that allows companies more flexibility, especially during seasonal peaks and aggressive scales. This guide examines contract labor law and agreement, service contract labor standards as well as its benefits and drawbacks, and employee vs contract labor.

What is Contract Labor?

Contract labor is typically defined as a business hiring an outsider to perform labor for a specific commercial venture. For example, the company may have devised strategies for creating a specific product. The only thing they might lack is a team to manufacture and package the product, even if they have all of the essential components and blueprints. Businesses use contract labor to cut costs.

As a result, contract labor involves employing a large number of workers, either for a single project or for seasonal work. Most typically, a labor contract is used. This is a legal document that outlines the terms of the employment contract. The expected completion date, project costs, payment, and reimbursement are a few examples.

When a company hires someone to do a specific project, this is known as contract labor. For example, a company may wish to develop a specific product and may want laborers to assist with construction and packaging. The corporation will continue to use this labor until the project is completed. Several companies prefer contract labor to long-term employment because it might help them save money.

Contract labor is usually used for seasonal or one-time projects and typically requires hiring a team of employees rather than a single person. This personnel will be hired through a labor agreement. Contract employees are sometimes known as independent contractors.
Labor contracts define the legal agreements between an employer and a contract worker.

Contract Labor Law

Contract labor law protects workers from unfair employment practices regarding salaries, time off, and other work-related issues. While employees are afforded numerous protections at both the federal and state levels, there are few labor laws in place to safeguard independent contractors.

Protection of Contract Labor Law

The Fair Labor Standards Act, or FLSA, is a collection of federal laws governing minimum wage and overtime pay standards for employees. These laws, however, do not apply to independent contract laborers. There are no federal restrictions specifying how much money a contract employee must make or how many hours a contract employee may work before getting overtime compensation.

Taxes Under the Contract Labor Law

Before compensating independent contractors for services provided, employers must get a Form W-9 from them. The W-9 form is used by employers to get a tax identification number or Social Security number to report payments over $600 to the IRS each year. Employers are required to transmit a copy of Form 1099 to both the contract laborer and the IRS to report total earnings for the year. Independent contractors are responsible for paying federal income taxes on their wages, as well as Social Security, Medicare, and self-employment taxes.

Contract Labor Considerations

There are considerably more laws protecting workers than there are laws protecting independent contractors. According to the California Department of Industrial Relations, employers frequently misclassify workers as contract employees to avoid paying Social Security payroll taxes on them and to avoid providing the remuneration and workplace benefits specified in the Fair Labor Standards Act.

Contract Labor Identification

The Federal Revenue Service gives basic principles for evaluating whether a worker is an employee or an independent contractor. Because standards are left open to interpretation, the government normally defines an independent contractor as a person who is behaviorally and financially dependent on a single organization. In other words, contract laborers utilize their tools and resources to finish a job, determine their prices for work, and do not receive compensation for travel or other expenditures incurred while on the job.

Service Contract Labor Standards

The Service Contract Labor Standards (SCLS), formerly known as the Service Contract Act (SCA), apply to any contract entered into by the United States or the District of Columbia for the primary purpose of providing services in the United States through the use of service employees.

  • Unless a specified exemption exists, contractors and subcontractors working on such Federal contracts must follow minimum wage, safety, and health standards, and keep certain records.
  • The Act requires non-exempt service workers to be paid a minimum wage, as determined by a Department of Labor wage determination (WD) or collective bargaining agreement (CBA), and employers to offer Health and Welfare benefits.

Centre Law and Consulting does compliance checks for contractors and defends Department of Labor investigations and proceedings against contractors for alleged Service Contract Labor Standards breaches.

Service Contract Labor Standards (SCLS) compliance is particularly challenging because the regulations affect multiple divisions within a business, including accounting, human resources, program management, contracts, and executive management. Violations can go undiscovered for years if there is no overarching view of all departments and no one knows where to look.

Contract Labor Agreement

A labor agreement, also known as an employment agreement, is a legal document that describes the terms and conditions of employment for a corporation. A contract labor agreement can also specify the benefits that will be granted to an employee and the criteria that must be met to get perks such as bonuses and raises.

A standard labor agreement typically focuses on an individual’s terms and conditions of employment at a corporation, as opposed to a project contract labor agreement that deals with unionized labor.

Common Clauses in Contract Labor Agreements

A list of typical clauses included in a contract labor agreement is listed below:

  • Employment and Duties
  • Term of employment
  • Compensation and benefits
  • Termination of employment
  • Proprietary information
  • Non-Competition and non-solicitation
  • Miscellaneous

Who Helps in Labor Agreements?

Attorneys with experience working on labor agreements work with clients. Do you require assistance with a labor agreement? Submit a project in the ContractsCounsel marketplace to receive free bids from law firms to create, review, or negotiate a labor agreement. All law firms are vetted by the team and peer approved by their clients before being recommended to you.

Contract Labor vs. Employee

Contractor labor and employee differ greatly in many ways. When deciding between contractor vs employee labor, consider the following:

#1. Payment, taxation, and benefits

One of the most significant distinctions between contractors and employees is how they are paid and taxed. When an employee is on a firm’s payroll, the company pays the employee an hourly wage or salary and withholds the necessary taxes (e.g., federal income tax, Social Security tax, Medicare tax).

Employee benefits are frequently paid for by the company. These might include mandatory work benefits such as health insurance as well as non-mandated benefits such as flexible spending accounts (FSAs), health reimbursement accounts (HRAs), health savings accounts (HSAs), paid vacation, commuting perks, and stock options.

#2. Autonomy

Another significant distinction between a contractor and an employee is their amount of independence. Michael C. Harman, an attorney with Harmon Law, said, “Most people think the only difference between an independent contractor and an employee is how they get compensated.” “In addition to paying, independent contractors have more control over their job.”

According to Harman, employees are hired to fulfill specified tasks at the instruction of their employers. On the other hand, independent contractors are often given a job or project to work on without the employer controlling when and how they do it, he added.

#3. Onboarding and training

Contractor and employee onboarding and training processes are very different. Because contractors are expected to concentrate on a specific project, they are frequently provided only the information necessary to complete that assignment, according to Kimberly Schneiderman, senior practice development manager at Randstad RiseSmart. Full-time employees, on the other hand, require lengthy onboarding processes to comprehend the complexities of team dynamics, corporate culture, and overall goals.

#4. Hiring goals

According to Schneiderman, the hiring goals for employees and contractors are likewise distinct. “Although firms seek to guarantee full-time employees remain engaged and loyal, these same organizations must recognize that their contractors are always looking for the next task and are not expected to be as focused in long-term outcomes as full-time employees,” she said.

Instead of focusing on long-term commitment, as they would for someone with employee status, many organizations value a contractor’s niche expertise. Many firms seek this knowledge or skill set for certain projects or assignments, even if it means hiring these contractors for a limited time.

#5. Flexibility

Another distinction between an employee and a contractor is the level of flexibility in their work. An employee works for one company and is thus subject to its rules and obligations. A contractor, on the other hand, has the option of working for one or more companies; in fact, it is normal for contract workers to juggle many clients at once.

How to Distinguish an Independent Contractor from an Employee

The IRS considers several elements to determine whether a worker is an independent contractor or an employee of a company. According to attorney Christy L. Foley, the following questions can assist you to determine how to classify a worker:

  • When, where, and how is the work completed? Is the job done at the employer’s location, or does the independent contractor work from home? Do the hours have to be set by the company, or can the independent contractor work whenever they want? Is the employer providing the tools, or does the independent contractor bring their own?
  • Is the employee obligated to complete company training? This is typically not required of independent contractors.
  • Is the employee working full-time, ongoing/constantly? Or are they working on projects with set deadlines temporarily?
  • Does the company cover travel expenses? The company often pays for employee travel expenses. Independent contractors, on the other hand, pay their travel expenses (and earn enough on the entire project to offset those expenses).
  • Is the employee paid hourly, weekly, or monthly? Or do they get paid when the full job is finished?

“Technically, the IRS looks at roughly 20 elements to determine whether someone is an employee or an independent contractor,” Foley said. “But, the ones mentioned above are the most common.”

Main Benefits of Contract Labor

When seeking for people to satisfy unique needs, contract labor provides flexibility. These advantages can accrue to both small and large businesses that preserve a separation between a full-time employee and contract personnel. The advantages include:

  • You can save up to 30% on typical payroll costs.
  • More control over the size of your personnel – expand or reduce as needed
  • Low obligation—when the contract’s terms are met, there are no bad feelings or unfulfilled expectations when it’s time to part ways.
  • Less legal requirements—aside from pandemic-related benefits, independent contractors aren’t often protected by as many state and federal regulations (minimum wage, overtime, sick leave, etc.).
  • Personalize your staff as needed—there is no need to invest additional time and money in training and developing employees when specialized work can be outsourced to a contractor with the necessary experience.

Main Drawbacks of Contract Labor

While contract work has some benefits, they are overshadowed by drawbacks. They include:

  • Less control over employees and their output—employees are independent
  • Turnover is high since there is little motivation to stay and little reason to be loyal to the organization.
  • Liability—a small responsibility does not imply any commitment if someone is gravely wounded at work.
  • Greater scrutiny—worker misclassification assures the IRS has the motive to audit.

What are examples of contract workers?

Contract employees, also known as independent contractors, contract workers, freelancers, or work-for-hire personnel, are individuals engaged for a specified project or duration for a set cost. Contract employees are frequently employed because of their experience in a specific field, such as writing or artwork.

Is contract labor the same as 1099?

Yes. A 1099 employee is not a full-time employee, but rather a contractor. These employees are also known as freelancers, self-employed workers, or independent contractors.

What is the difference between subcontractor and contract labor?

Normally, a contractor works under a contractual agreement to provide services, labor, or materials to finish a project. Subcontractors are companies or persons who perform work for a contractor as part of a larger contracted project.

Who is considered contract labor?

Contract workers, also known as independent contractors, are typically employed on a short-term basis for specialized tasks or services. Contract workers are not expected to be provided long-term employment or benefits.

Why contract work is better than permanent?

Generally earn more than a permanent employee. You might be able to work from home. Flexible hours and schedule. More control over the volume and type of work completed.


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