Understanding the different worker classifications can help you make informed decisions for your business. Interns, independent contractors, and employees all have different legal definitions and legal protections. Finding the right designation for your worker can set the foundation for a legal and fair employment relationship.

Internships are meant to provide an educational work experience to students and others seeking to enter a certain career field. Determining whether a worker is an intern or an employee has important legal ramifications. The Fair Labor Standards Act established the “primary beneficiary test” for determining whether someone qualifies as an intern. Some of the test’s 7 qualifications include:

• “The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
• The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
• The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.”

What is most important to remember when establishing an internship is that the intern must be the primary beneficiary of the relationship, gaining valuable career experience, and not just providing free labor. If an intern is determined to be an employee, they will be retroactively entitled to all of the corresponding benefits, including minimum wage.

An employee is someone who is hired to work for a business and is “subject to the employer's direction as to the details of how to perform the job.” The employer not only gets to set employee’s tasks, but also gets to set the methods through which those tasks are completed. In turn, employees have significant protections under state and federal law. For example, they are entitled to the state minimum wage and other federal labor protections under the National Labor Relations Act. In addition to wage and hour, health and safety, non-discrimination, health insurance (depending on the size of the employer) obligations, employers are responsible for “withhold[ing] income taxes, Social Security, and Medicare from wages paid.”

An independent contractor is self-employed. In other words, independent contractors are essentially their own businesses and offer a specific service to another business. The main difference from an employee is that an independent contractor gets to control the way in which the work will be completed. Although the designation can seem murky, the classification turns upon the degree of control and independence the contractor can exercise. Independent contractors are responsible for purchasing their own insurances, tools, equipment, and withholdings. Independent contractor misclassification has been commonplace for decades, largely as a cost-saving measure, and is increasing with the rise of the gig economy. Contractors offer significant advantages, including limiting the need for staffing for discrete/part-time projects and lowering payroll costs. To reap these advantages, businesses should formalize the relationship with an independent contractor agreement that details the scope of the services and the respective parties’ responsibilities. As a further safeguard, businesses should work with contractors who have set up their own business entities and carry their own licenses and insurances.

Determining whether someone is an intern, independent contractor, or employee can have significant legal and financial repercussions. All three can play invaluable roles to your business’ growth. Classifying your workers correctly will help your business run more smoothly and prevent possible legal problems in the future.