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The relationships created between company and individual by employment contracts in the U.S.

In this latest article in our series on U.S. employment law for foreign companies, Ilinois law firm member Masuda Funai explains the different types of relationships created by a contract and the implications

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Relationships with independent contractors

"The independent contractor is able to provide services to more than one company at a time and no one company controls the independent contractor’s methods of providing services."
Alan Kaplan, Masuda Funai, Chicago
Alan Kaplan, employment law attorney Chicago

Employment contracts may take different forms and are based upon the nature of the legal relationship between the parties. The company must first define that relationship before setting forth the specific provisions which will apply. The relationship defines an individual as:

  • An independent contractor
  • Employee
  • Leased employee, or
  • Temporary employee.

The rights and obligations of the parties vary depending on the type of relationship which is established. 

1. Independent contractor

Generally, a company has less control over an independent contractor than it would have over an employee. A company who contracts with an independent contractor is usually contracted to perform independently a discrete task or tasks for a fixed period of time and usually uses his own tools to perform those tasks.

The company typically does not establish hours, working conditions or rules specifying how the individual performs his tasks. Inventions developed by an independent contractor are his property and not the company’s property, unless there is a contractual provisions specifying ownership of the invention.

A company which contracts with an independent contractor is not obligated to pay social security taxes or to deduct federal and state withholding taxes from the individual’s compensation. In addition, the company is less likely to be held vicariously liable for the individual’s tortuous actions. Moreover, the company need not provide the employee with costly worker’s compensation insurance, health insurance or other employee benefits, which may be mandatory under both the state and federal employment laws.

Manufacturers contract with independent contractors who act as sales representatives, sales agents and distributors. Contracts with these individuals are especially important because laws in some states specify how these relationships should be established, implemented and terminated. Other laws protect sale representatives and distributors from unfair terminations and help ensure payment to them of commissions for sales procured through their efforts.

For these reasons, the independent contractor status sounds appealing to many companies. However, merely labeling an individual an independent contractor does not guarantee that the federal and state government agencies will agree. Instead, federal and state agencies may audit the company’s records and rule that an independent contractor is an employee, if the relationship more closely resembles that of an employee. As a result, the company will become liable for unpaid taxes and may incur other liabilities. Therefore, the company and individual must carefully establish the independent contractor relationship.

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2. Employee

Employees having employment contracts work for a definite or indefinite period of time and receive compensation in regular intervals, usually based on time worked rather than by the completion of a project. Employees usually have the ability to bind their companies to contractual obligations. The company is vicariously liable for the acts of its employees and will be liable in tort for wrongdoing done within the scope of employment. The company must comply with the many federal and state employment laws, which govern the employment relationship, which protect employees from discrimination and which provide employees with minimum wage restrictions, maximum hour restrictions, and other pro-employee rights and privileges.

"Employment contracts specify their rights and privileges and may alter the “at will” relationship by limiting the employer’s right to terminate the relationship at any time, for any reason and with or without notice."

3. Temporary and leased employees

Temporary and/or leased employees are usually employed by a leasing or temporary employment agency. The agency’s customers usually use the services of the agency to find employees to fill specific jobs of a temporary duration. The agency and/or employee leasing firm compensates the employee, pays the employee’s employment taxes and is generally responsible for complying with federal and state employment statutes.

"Contracts with employment agencies specify the absence of a relationship between the company and employee and set forth the company’s and agency’s legal obligations to the employee."

For advice on U.S. employment law in Illinois

For employment law advice specific to Chicago, Illinois, please contact Masuda Funai.

For help in other U.S. cities, please search for a trusted member firm using our worldwide directory search tool.