The difference between an independent contractor and an employee is not just legalese — you need to know the legal and practical ramifications that go with each designation in order to protect yourself and your business.

Following is a guide to understanding the differences between independent contractors and employees:

Workspace

One key difference between an employee and an independent contractor (IC) involves how, when and where the work will get done. Employees usually work at the employer’s place of business, while ICs do not, working instead from home or from their own studio or office.

Employees are generally expected to work during designated hours or work certain shifts during the employer’s business hours; ICs tend to set their own hours or schedule specific work times if necessary.

Generally speaking, an IC enjoys more control and autonomy over their work, subject of course to any specifications set out in their contract. For example, a design contract often specifies the size of the sample garment or specific design features that must be included. Employees generally will be more closely supervised and expected to follow the business owner’s policies and procedures.

Raw Materials

Another difference between employees and ICs involves the raw material necessary to complete any projects, such as sample garments or teaching handouts. The employer typically gives employees materials — fabric to create a sample quilt, for example — when creating samples is part of the job. ICs, in contrast, are not necessarily given the materials and tools necessary to create projects for the hiring business.

While a yarn shop employee may use needles and yarn provided by the shop to stitch up a shop sample, an IC must provide her own needles and other tools, and, depending on the terms of the contract, may be required to provide or secure yarn herself. Most magazine publishers in the knitting world, for example, send their ICs specific yarn to use for a given project. Book publishers, however, leave yarn selection and procurement up to the IC.

Benefits and Compensation

When you are employed by a business, you are generally given a regular salary — in this context that is often an hourly wage — and receive a paycheck on a set schedule. Taxes and other withheld amounts, such as FICA, are taken out of the employee’s salary by the employer and paid to the relevant governmental authority. Employees are subject to (and protected by) many regulations, such as the federal minimum wage laws, workplace safety regulations and any other applicable federal, state and local laws. Employers also are required to check the citizenship of their employees. Each year, the employee receives a W-2 form for income tax purposes. Depending on the employer and whether the employee is part-time or full-time, the employee may receive sick and vacation days, and may be covered by worker’s compensation insurance. Complying with the applicable regulations and providing regular paychecks may add significantly to the cost of hiring an employee.

In contrast, ICs get very little legal protection and benefits. ICs receive no vacation or sick days from the businesses they work for and do not get a regular paycheck. Typically, an IC invoices the business for work as it’s completed and receives payment at a later date. The IC’s contract may specify how soon after project completion an invoice will be paid but, in practice, ICs often have to wait to receive payment. Although ICs do not get many of the benefits of employee status, they are not subject to minimum wage laws and can set their own prices. At the end of the year, an IC will receive an IRS Form 1099 from the various businesses, showing the specific amounts paid to the IC by those businesses during the past year. The relative ease and lower cost of using ICs makes them especially attractive to smaller businesses.

Independence

There’s a good reason why the word “independent” appears in the term “independent contractor” — an IC has the ability to provide services to many different businesses at the same time. An IC may be under contract to multiple businesses simultaneously without worrying about non-compete or other restrictive clauses. An employee, in contrast, owes some measure of loyalty to their employer, and most businesses would look askance at a regular employee moonlighting with a competitor.

Intellectual Property

Given the craft industry’s focus on works of creativity, the employee versus IC distinction is especially important when it comes to intellectual property rights. The worker’s legal status determines who owns the fruits of her labor.

As a general rule, when an employee for a business creates something — a crochet pattern, quilt design, sample knitted garment, blog post or advertisement — as part of their job duties, all intellectual property rights in that creation vest in the employer. The employer automatically owns the rights to these creative works without the need for any written contract to that effect, and the employee does not automatically retain any rights in the work. That means a quilting shop owner can have his employees create patterns, advertising, store window installations, class handouts and any other creative output for the shop and still be secure in the knowledge that the business retains all of the intellectual property rights in those works.

That being said, it’s worth noting that products an employee creates on their own time, with their own materials, that are not intended for use in their employer’s business, remain the sole property of employee. For example: Quilting shop employees can therefore make quilts and patterns at home for their personal use or for sale to third parties; and yarn shop employees can sell their own line of patterns on the Internet so long as they were not created on the employer’s watch or with materials supplied by the employer.

Intellectual property law treats the works created by ICs differently. If an IC creates a work for a business — whether it’s a shop, website or publication — the IC automatically retains all of the intellectual property rights in that work. In a sense, ownership by the IC is the default setting and is what happens if the parties do not make other arrangements.

However, the IC can sign a contract transferring all their intellectual property rights to the person or business hiring them. For many years, mainstream publishers and companies insisted on purchasing all underlying intellectual property rights in perpetuity when they purchased knitting and crochet designs. In recent years, however, designers have been able to negotiate shared rights, or rights that are exclusive to the purchaser for a period of time and then revert back to the IC.

Whether someone is categorized as an “employee” or an “independent contractor” is more than semantics; it’s a status distinction that carries meaningful legal and practical consequences. Understanding those consequences can make a big difference to you and your business.