A Contract Employee works for an agency that contracts out their work to various employers. The agency usually provides Worker's Compensation insurance and withholds taxes. Desirable agencies also have health insurance and other benefits available at a group rate, i.e., you pay for them, but at a discounted rate.
Contractor
A contractor is one who contracts; one of the parties to a bargain; one who covenants to do anything for another; specifically, one who contracts to perform work on a rather large scale, at a certain price or rate, as in building houses or making a railroad.
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