Why Do Small Businesses Need to Know about Types of Employment?

According to the Small Business Administration, small businesses employ more than 61.7 million people—or 46.4% of the total workforce. And if you’re planning on adding to that number, it’s important you understand how to hire the right people.

In some situations, the right people may be full-time employees. But in other situations, they may also be a different type of worker—like a part-time employee or independent contractor.

There are a variety of workers you can hire—and a variety of ways to hire them. But what, exactly, are the different types of employment? What are the differences between them? And how can you ensure that you’re not only hiring the right people but classifying them correctly?

What Are the Different Types of Employment?

Types of employment are broken down in three different ways: by employment status, employee type, or type of contingent worker (or non-employee). Between the three categories, there are 11 types of employment.

Employment Status

Employment status defines the type of relationship that exists between your business and a worker—as well as the level of control you have over how said worker does their job. Here are the different types:

1. Employee

An employee is a worker that fills a key role for a business—and is under contract to perform that role on an ongoing basis. Employees have limited control over how their work is performed or finished. 

The employer controls: 

• What hours the employee works
• Where the employee works
• When the employee can have a break or take time off
• How and when the employee is paid
• Which tools and equipment to use for each specific task

Generally, employees are also dependent on a single employer for the majority of their income. Employees are paid through the employer’s payroll on an hourly or salaried basis and report their earnings to the IRS on a W-2 form. 

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Employees are covered by the Fair Labor Standards Act (FLSA), which has requirements around minimum wages, overtime pay, recordkeeping, and youth employment. 

Employees are also entitled to certain employment rights and protections (like the right not to be discriminated against and the right to receive equal pay for equal work), as well as other potential benefits (like health insurance, holiday pay, and parental leave).

2. Independent Contractor

An independent contractor (IC) is self-employed and works for one or more businesses on a contractual basis. In most cases, work performed by an independent contractor isn’t central to a business’s day-to-day operations. They are also known as contingent workers.

They are typically hired to work on specific projects for a certain length of time (for example, to design a logo or to manage the marketing for an upcoming event). 

Different terms are used to describe independent contractors, including:

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• Freelancers: These are ICs that often work in creative fields and provide specific skills and services, like graphic design, SEO, and writing.
• Consultants: They have a high level of expertise in a given industry—like marketing, human resources, or IT—and are hired to provide specialized guidance and advice (as opposed to performing actual work for the company).
• Contractors: They include both freelancers and consultants, as well as other types of non-employees, like electricians, tax preparers, and trainers.

3. Self-Employed

Self-employed individuals work for themselves by owning and operating their own businesses (much like you do as a business owner). Though independent contractors are also classified as self-employed, not all self-employed individuals are contractors.

For example, a self-employed person might actually be a full-time employee of their business—in which case, they wouldn’t be considered an independent contractor.

Self-employed workers are responsible for all the same tax obligations and costs of doing business as independent contractors. In addition, depending on the type of business they operate, some self-employed workers take on other responsibilities, like paying payroll taxes for any employees they hire.

Type of Employee

Businesses hire different types of employees based on specific business needs and preferences—and while all of them fall under the “employee” umbrella, there are different expectations around how much, for how long, and how often they work. These types of employees include:

4. Full-Time

Full-time (FT) employees are permanent employees. According to the IRS, full-time employees work an average of 30 hours per week or 130 hours per month (but many work between 32 and 40 hours). 

A full-time employee is typically entitled to employer benefits, like paid time off. And if the business has 50 or more FT employees, under the Affordable Care Act (ACA), the company is required to offer those employees minimum essential healthcare coverage.

5. Part-Time

Part-time (PT) employees are permanent employees that typically work for less than 30 hours per week. They also generally work fewer hours per day and/or fewer days per week than FT workers. 

Part-time employees aren’t always eligible for employer benefits—although some businesses do extend benefits to PT employees as a way to attract talent and stay competitive in their market. 

6. Seasonal

Seasonal employees are short-term workers that businesses hire at specific times throughout the year—typically during busy seasons. (For example, a restaurant in a tourist area might hire seasonal employees during summer, when tourism peaks.) 

Seasonal workers can work on either a full-time or part-time basis, though they’re not typically entitled to the same benefits as employees. 

7. Temporary

Temporary employees (also known as temps or casual employees) are just that: temporary. A temporary worker is usually hired for a set period of time or for a specific project. 

For example, a company might hire a temporary employee for a three-month period to cover for a full-time employee that’s out on parental leave.

Staffing agencies often provide temporary employees to businesses, though businesses can also hire temps on their own.

8. Leased

Leased employees work for staffing agencies that contract them out to various businesses in need of extra help—with the staffing agency responsible for paying the employee’s wages and providing any benefits. 

In other words, the worker is an employee of the staffing agency—but actually performs their job at another business.

Leased employees can be “borrowed” for as long as a business needs the extra help—with the business paying a fee to the staffing agency (generally an hourly rate plus a markup) for the length of the contract.

Why Is It Important to Understand the Different Types of Employment?

Now that you’re familiar with the different employment types and types of workers, let’s look at why these distinctions are so important.

To Accurately Classify Employees–And Avoid Fines

The IRS and U.S. Department of Labor—as well as some states—penalize businesses for misclassifying employees. Plus, if workers are misclassified and excluded from employee benefits they’re otherwise entitled to, that could also lead to legal liabilities and potential lawsuits.

To Ensure a Good Fit…

Sometimes, your business needs a full-time employee to manage ongoing work. Other times, the better fit is to bring in someone with specialized experience to help with a one-off project. 

Understanding which type of worker you can hire can help you choose the best person for the job—whether that’s a permanent employee or a short-term freelancer.

…and to Help Your Business Grow

Understanding the different types of workers can help you fill gaps as you scale your business. For example, according to the Society for Human Resource Management (SHRM), the average cost of hiring a new employee is $4,700. Knowing that you don’t necessarily need to invest in hiring a new full-time employee for every job—and can instead, for example, hire a specialist on a contingent basis or a seasonal worker during peak periods—can help you reduce hiring costs without sacrificing your business’ growth. 

How to Accurately Hire and Classify Workers

You know it’s important to hire the right type of workers for your business (and, once they’re hired, classify them correctly)—but how, exactly, do you do that? Let’s look at ways to hire (and classify) the right type of workers for your business:

Evaluate Your Business Needs

Before you can hire any type of worker, you need to evaluate what kind of support your business needs. That will give you a baseline for the type of workers you need to hire.

When evaluating opportunities at your business—and how to hire for those opportunities—some things to consider include:

• If the position is permanent or temporary
• If temporary, if the position could become permanent
• If the role is essential to your business
• The specific skill set required by the worker to complete the job
• How many hours per day you need support
• How much control you need over how/when/where the work is performed
• The amount of training the worker would require to be productive in the role
• If you need to provide specific tools and equipment that aren’t commonly used in your business

Once you have the answers to these questions, you can use them to determine what type of worker it makes sense to hire. 

For example, a construction company that needs help answering phones while they’re building a new development could offer a receptionist full-time employment—but might benefit more from hiring a temp or seasonal receptionist to get them through the busy building season.

Put the Right Contract in Place

After hiring a worker, it’s important to iron out the terms of employment. In general, for anyone you hire, you’ll want to use a contract to clearly outline the role and lay out your expectations—whether that person is an employee or an independent contractor. 

With an employee, their employment contract should specify that employment is ongoing (at least until a certain date), with information about working hours, how and when the employee is paid, whether it’s at-will or not, and what the job responsibilities include. 

On the flip side, your contract with an IC should clearly state that the role is temporary and limited in scope, with the contractor responsible for costs beyond those outlined in the contract.

In the event of an allegation of misclassification, these documents can serve as proof that both parties understood the terms of employment and potentially swing the ruling in your favor.

Accurately Classify the Worker

No matter who you hire, it’s important to determine what kind of worker they actually are—and then classify them accordingly using the following guidelines from the IRS and DOL.

The IRS determines if a worker is an employee or contractor by analyzing how much control you have over the worker’s:

• Behavior: What a worker does and how they do their job
• Finances: How and when the worker is paid, what they’re paid, and if you provide tools or equipment
• Relationship with your business: If there is a written contract, what employee benefits you offer, and how long employment is expected to last

Generally speaking, if you have control over a worker’s behavior and finances and you’re planning on having them work for your business for a long period of time, they would likely be classified as an employee.

The DOL also provides criteria for classifying workers, which include:

• If the work being performed is an integral part of your business
• If the working relationship is permanent or temporary
• How much the worker invested in tools or equipment necessary for completing the job
• How much control you exert over the worker
• If the worker’s managerial skills can cause your business to gain or lose revenue
• If the worker possesses any special or competitive skills

Again, if a worker is an integral part of your company, you control their workflow, and they’re with your business for the long haul, chances are they’re an employee.

Now, it’s important to remember that these factors are weighted; for example, asking a worker to show up at 8 a.m. on Tuesday doesn’t mean that worker is an employee by default; they could be an independent contractor—but just need to be on-site to attend a specific meeting.

In other words, there are no cut-and-dry rules on employee classification. Classification can be subjective—so if you’re unsure of how to classify your workers, make sure to consult an employment lawyer to avoid potential penalties and legal liabilities.

Understand the Different Types of Employment to Hire the Right Workers 

Hiring new workers can feel like a big question mark; who do you hire—and once you hire them, how do you classify them? 

But now that you understand the different types of employment, you’re armed with the information you need to hire the right workers for your business (and classify them correctly). So what are you waiting for? Get out there and build your ideal team!