Employee, Contractor or Worker? What’s the Difference?

The question came up during a discussion about the difference between Employee Stock Ownership Plans (ESOPs) and Worker Cooperatives. Why couldn’t it be Worker Stock Ownership Plans and Employee Cooperatives? It may seem like a question of semantics or really just splitting hairs. It isn’t. The distinction is really important and mostly has to do with control.

employee vs worker

Sometimes companies get in trouble when they try to classify employees as independent contractors. They do this to avoid some of the labor laws that protect employees from abuse or the benefits employees are entitled to. The reason labor laws are necessary is that the employer/employee relationship is not a relationship among equals. The employer has way more power than the employee. We are not going to get into a discussion of why that it is so here except to say that this is the way it is and most people can agree on that.

Independent contractors on the other hand do not have these protections and theoretically they do not need them. The idea is that the relationship is one of equals between one contractor and another contractor. That can quickly become an illusion when an individual contracts with a large corporation and the large corporation begins to decide how or when the contractor should do his or her work. This is frequently the situation when the Department of Labor steps in to protect the little guy. In other words, the distinction between an employee and a contractor has more to do with control than it has to do with how they are paid.

Sometimes you hear employees referred to as workers and without a doubt they do actually work and so do contractors. So why do we prefer the term worker when we talk about worker cooperatives and not employee cooperatives?

The reason is all about control. The relationship employees have with employers is a servant/master relationship. The employer tells the employee what to do and how to do it. Workers in a worker cooperative, on the other hand, are more like contractors. The relationship between workers in a worker cooperative is by definition one among equals. Every member has only one vote regardless of their contribution of labor or capital.

Because workers in a worker cooperative make all the decisions about how they should organize themselves, no one outside the cooperative who is not a member can tell them what to do. Even though members of cooperatives are independent individuals with control over themselves, they frequently choose to give up that control, not to an employer, but to their fellow workers in community with them. They become a worker cooperative.

Some worker cooperatives decide that they like the protections of labor laws and voluntarily subject themselves to them. Some are even unionized. Others prefer to treat each other as partners. All of them have their own reasons for what they do.

Some states have cooperative corporation laws. Most, if not all, assume the workers will treat themselves as employees. But worker cooperatives do not have to incorporate as cooperative corporations to be considered a cooperative. There is no single universally accepted definition of what a cooperative is. Any legal entity, except a sole propriety, can be a cooperative. Each one is different as defined by its members. Some frequent characteristics are that they are democratically controlled on the basis of one person, one vote and that surplus, profit attributable to the labor of its members, is distributed according to labor contribution rather than capital contribution.

This debate may seem trivial, but it is not. It becomes particularly important when we talk to policy makers and employers about converting companies to employee ownership to preserve jobs. That conversation frequently lumps worker cooperatives and stock ownership plans together as one and the same, but they are not. They are fundamentally different and it has to do with control.
Governing the Firm: Workers’ Control in Theory and Practice
Why are companies almost always controlled by shareholders and not by their workers? This book suggests that labor is inalianable from the workers. The worker must always be present to perform the labor. Capital, on the other hand, can freely move around the economy regardless of where the owner is.

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