Classifying Workers

In the U.S., both state and federal governments regulate employment and independent contractor relationships. Independent contractors and employees are treated differently under the law, and this can have a big impact on your business, as it often costs more and takes more time and resources to manage employees than it does to manage independent contractors. It may seem like bringing on independent contractors is the easy choice, but whether a worker is considered an independent contractor or an employee under the law is a factual determination based on the circumstances of the work and the relationship between the company or individual and the worker. It doesn’t matter what the contract between the parties says or what was agreed upon; if the worker is treated like an independent contractor, they will be considered an independent contractor and if the worker is treated like an employee, they will be considered an employee.

Independent contractors (also called “1099 independent contractors” or “1099s,” in reference to the tax form used for these types of workers) are generally considered project-based workers engaged by the company or individual to work on a specific task or set of tasks, usually with a defined end date. The company or individual who engages the worker doesn’t control the manner and means by which the worker performs the work (meaning, they don’t tell them how, when, where, etc. to do the work); they only control the result of the work. Employees (also called “W-2 employees” or “W2s,” similarly in reference to the tax form issued to these types of workers by employers), on the other hand, are managed much more closely and subject to any lawful direction about how to perform the work by their employer. Independent contractors typically work for many different clients under their own business name, while employees typically work for one company and operate individually. 

The U.S. federal government (through agencies like the Department of Labor and Internal Revenue Service) and many U.S. states monitor worker classification, and they have tests to determine whether a worker is an independent contractor or an employee. Below are some online resources on worker classification:

Make sure to check the state government websites for the states in which your business operates to ensure you are complying with all applicable employment laws and regulations.

Misclassification of employees can result in large penalties to businesses. Workers who were classified as independent contractors when they should have been treated as employees, could bring legal claims against the business to receive the pay and benefits they would have received as employees (things like back pay if paid less than minimum wage, overtime pay, workers’ compensation coverage, and health benefits). Multiple misclassified workers could work together to bring a class action lawsuit against the business for misclassification of workers. State and federal regulatory agencies could take action against the business and levy a variety of penalties, including a full shutdown of the business.

Workers who were classified as employees when they should have been treated as independent contractors were most likely paid and offered more than they should have received, so it is generally less likely that a business would face the same risk of legal claims and penalties for misclassification.