We’ve all heard of Uber: the transportation application that helped you get home last weekend, and the invention that’s causing some taxi drivers to lose their cool. Uber’s success has been rapid and widespread, meaning that the recent lawsuit concerning the misclassification of their drivers as independent contractors rather than employees was very much in the public eye.

The distinction between employee and independent contractor is critical. As a business owner, you should be aware of what duties constitute what titles, so as to avoid running into trouble like Uber did. Here’s what you can learn from this lawsuit:

Employee vs. Independent Contractor

The IRS defines an employee as “anyone who performs services for you if you can control what will be done and how it will be done.”

An independent contractor, on the other hand, need only produce the payer’s desired result, without being told how it will be done. Lawyers, dentists, and other specialists with private practices are considered to be independent contractors. Many businesses hire such specialists to perform certain tasks for their companies, and this is where the water gets murky.

Still confused? Don’t worry. So are some big businesses. FedEx also faced a similar lawsuit regarding this discrepancy last year.

But what’s so crucial about this distinction that keeps bringing this issue to the court room?

Why it matters:

The main factor that makes the “employee” title more desirable are the benefits that go along with it. These are things such as pension plans, insurance, vacation pay, etc.

Independent contractors are also required to pay the Self-Employed Tax, which is essentially a Social Security and Medicare tax, in addition to their income tax.

What happened with Uber:

The plaintiff in the aforementioned trial was a Californian Uber driver who claimed she deserved to be classified as an employee rather than an independent contractor. Since Uber is involved in “every aspect of the operation” from contracting drivers, approving their vehicles, and setting the car fare, the California Labor Commissioner said “she’s right,” making all Uber drivers in California official company employees.

It doesn’t look like it will end in California, either. On August 6, 2015, Uber goes back to trial to determine the scope of this decision.

But Uber’s claiming that most drivers don’t even want to be considered employees, because it could give them less flexibility with their hours and in some cases prevent them from working multiple jobs. 

What this means for you:

Clearly, this distinction is important. As an employer, you should be aware of it. As an employee or an independent contractor, you should also be aware of it in order to know your rights. Luckily, the IRS has compiled a checklist to help you make this call.