The workforce is a very important part of Nigerian economic development as many

industries largely depend on them for their growth. A country's workforce is divided into two

main categories- Employees and Independent Contractors or Service providers.

It is important to distinguish between an independent contractor and an employee to enable

businesses understand the legal and financial implications of hiring either of them.

Consequently, it is important to note that the cost of maintaining employees is significantly

higher than the cost associated with hiring independent contractors due the requirement of

the Labour Act which entitles employees to employment benefits which independent contractors

are ordinarily not entitled to.

In addition to this, employees enjoy maximum protection of the law under the Labour Act,

Employee's Compensation Act and other employment laws in Nigeria. Suffice to say that the

need to understand the distinguishing factors between employees and independent contractors

can not be overemphasized.

Definition of Terms

An Employee also known as a worker is an individual who works either part-time or full time

for an employer under a contract of employment, whether oral, written, express or implied and

has recognized rights and duties. Employees are often considered part of the core workforce,

meaning they have a long-term commitment to their employer. Unlike independent contractors

who have more flexibility in how they complete their work, employees must generally adhere to

specific working hours and follow established company policies and procedures
An Independent Contractor also known as a service provider is a person or an organization

contracted to provide services to another entity (the client) under a contract for service. Think of

independent contractors as the freelancers of the working world. Independent contractors are

individuals who provide services to a company or organization on a contractual basis. They're

not considered employees and typically work on specific projects or assignments.

Independent contractors can be found across various industries – from graphic designers and

writers to consultants and IT specialists. Their expertise makes them valuable assets for

companies looking to tap into specialized skills without committing to long-term employment

contracts.

How to determine whether a person is an employee or an independent contractor

1. Contract of Service- Employment Agreement

Under the Nigerian law, the relationship between an employer and an employee is that of a

master and servant relationship, hence a contract of service is created at the inception of this

relationship. This is so because the employer is directly in control of the work-related activities

of the employee. Such as the time of work, the tools and equipment used for the work, when and

where the work should be done and the manner in which the work must be done.

Note that for employment relationships, the parties need to sign an Offer Letter and

an Employment Agreement.
2. Contract for Service- Service/Independent Contractor Agreement

This an agreement between an independent contractor and a client to carry out a specific project

or assignment for a fee. In this case, the independent contractor who is considered an expert in

the service he is contracted for is in direct control of how work is done and provides the requisite

work tools for the job.

For independent contractor relationships, the parties need a Service

Agreement and/or Engagement Letter to define and regulate their relationship.

Major Differences Between an Employee and an Independent Contractor

It can be sometimes difficult to correctly identify the differences between an employee and

independent contractor hence, having a classification process that puts policies in place for hiring

and managing employees and/or independent workforce is incredibly important because

misclassifying an employee as an independent contractor may attract costly legal implications.

This section will identify and give precise differences between employees and independent

contractors.

1. Independent Contractors are in Direct Control of Their work

Independent contractors control their work, the manner and time their work is done and the tools

and equipment used to do their work. Unlike employees, independent contractors are not subject

to control by their clients and their work is done with little or no supervision.
2. Independent Contractors Provide Their Own Work Tools and Equipment

Independent contractors usually provide their own work tools and equipment. While employees

use the work tools and equipment provided by their employers. Also, unlike independent

contractors, employees may be required to work from offices provided by employers.

3. Independent Contractors Usually Operate their Own Businesses

Independent contractors usually operate as sole-proprietors, partners and companies. It is not

uncommon for independent contractors to have a business name and work for multiple clients.

While employees operate only as individuals.

4. Independent Contractors Openly Market Their Services

Independent contractors openly market their services because they are in direct control of their

business. Conversely, many employees are not allowed to work for other employers as they are

limited by a Non-compete Agreement or other provision that may limit or prevent them from

engaging in other paid employment.

5. Independent Contractors are Experts in Their Industries

While employees receive some sort of training for their jobs, independent contracts bring their

specialized expertise to their work. Consequently, independent contractors may not require any

special training to do their work.

6. Independent Contractors are Responsible for Their Own Taxes

While employers withhold and remit taxes on behalf of their employees, independent contractors

on the other hand remit their own taxes and usually withhold Value Added Taxes (VAT) and

remit same on behalf of their clients.

7. Independent Contractors are Ineligible for Employment Benefits

Under the Nigerian Labour Act, only employees are eligible for employment benefits. These

benefits include bonuses, allowances, insurance, retirement plans, etc. Also, independent

contractors do not receive legal protections such as Worker's compensation, right of association

with trade unions, etc. as the employees.

8. Independent Contractors Generally Control their Payment

Unlike the employees who receive specific salary at a fixed period, independent contractors are

generally paid a fixed lump sum or through an invoice system. They may have a standard billing

rate for their service which is usually paid after an invoice has been issued to the client.

9. Employees Usually Work for an Indefinite Period of Time

Unlike independent contractors, employees usually work for an indefinite period of time. While

independent contractors are usually engaged for a specific project and shorter period of time.

10. Independent Contractors may Subcontract or Delegate Their Work

Generally, independent contractors may contract sub-contractors to do their work since they have

control of how their work is done. While employees are required to do their work themselves

except in cases where a supervisor or head of department may be allowed to delegate work to

members of their team who are also employees of the employer.

How to Determine If You Should Hire an Employee or an Independent Contractor

Making a decision to hire an employee or independent contractor can be a very daunting task.

This section will provide guidelines on determining who should be hired. These factors include:
- The nature of work to be done: A business may choose to hire an independent contractor if

they only need a specific work to be done or work to be done within a limited period of time.

Also, if the work is essential to the business and not a peripheral job, an employee should be

hired. For example, a cashier person is essential in a bank while a cleaning crew may not be very

essential. Hence, the bank must hire cashiers as employees and may hire a cleaning service

agency as independent contractors.

- An expert opinion is required: An independent contractor may be hired where an expert

opinion is required. For example, a company may hire a law firm as its external company

secretary for the purpose of attending board meetings and proffering legal advice before making

core business decisions.

- Exertion of control: A business may choose to hire employees if it intends to exert control

over the manner in which work will be done and the work tools and equipment to be used for the

work. An employee may also be hired if the work needs to be done under thorough supervision,

while an independent contract may be hired where the job can be done by a professional that

requires little or no supervision.

- Cost of Labour: A business may decide to hire an independent contractor to save cost.

Independent contractors are not entitled to employment benefits such as insurance, retirement

benefits, allowances, bonuses and other employment benefits. Conversely, they are only paid a

set rate and even provide their own work tools. This will save a lot of cost for businesses.

The consequences of worker misclassification

Knowing the difference between an independent contractor and employee is the first step

towards avoiding worker misclassification. It is important to note that worker misclassification

can have significant legal, financial, and operational consequences for both the employer and the

misclassified worker. Tools like ZenBusiness offer helpful guidance on how to hire and classify

independent contractors, which can support proper compliance from the start.

Violations of labor laws

Misclassifying employees as independent contractors puts the employer at risk of violating labor

laws. Similarly, in the realm of digital transformation in insurance, companies must navigate

complex regulatory environments to innovate while remaining compliant.

Depending on the country, employees can be entitled to minimum wage, overtime pay, and

protections against workplace discrimination.

Since the law usually treats contractors as independent business owners, employers don't have to

give them employee benefits. However, not paying attention to government regulation regarding

who is considered to be an employee versus contractor can result in breaking the law. Whether

this is intentional or not, employment law violations can result in fines, penalties, and legal fees.

Employment claims

Besides potential problems with the government, misclassification can also lead to issues with

the misclassified workers themselves. Workers that believe they have been misclassified may sue

their employers seeking back pay, unpaid overtime, and other benefits they have the right to.

Tax liabilities

Withholding of income taxes, social security, and health insurance from employees' wages is

usually the employer's responsibility. Workers who are misclassified may not be withheld these

taxes, resulting in underpayment or back taxes.

Unemployment insurance

Misclassified workers are financially vulnerable in the case of job loss or workplace injury. This

is because misclassification leaves them ineligible for unemployment insurance or workers'

compensation benefits.

Back wages and employment benefits

If misclassified workers are later determined to be employees, employers may be required to pay

back wages and overtime. What's more, employers may be liable for retroactive employee

benefits, such as health insurance and retirement contributions.

Reputation and employee relationship damage

Misclassification cases can damage the employer's reputation, especially if the case becomes

public or attracts media attention. In addition to that, if employees perceive unfair treatment or a

lack of compliance with labor laws, misclassification disputes can strain employee relations and

reduce morale.

Conclusion

While employees work under the control of an employer with a long-term commitment and

benefit entitlements, independent contractors operate independently, typically on a short-term or

project basis, and are responsible for their own tax and business obligations.

Understanding this distinction is important for both employers and workers, as it determines

legal rights, responsibilities, and protections under labor and tax laws.