An employee usually works under the control of a company, at set hours, with the company’s tools. A contractor runs their own business and decides how the work is done.
This difference matters because it changes taxes, insurance and rights. Calling someone a contractor in the paper is not always enough. Authorities often look at how the work is really done. Use a clear agreement and make sure daily practice matches it.
Tip: check your local rules, because tests for this are different in each country.
General information only, not legal advice.