Misclassifying Employees as Independent Contractors & Legal Consequences

Around 10 million workers have been classified as independent contractors in the United States, and that number has risen dramatically in the last several years. Independent contractors are found in many different industries and occupations, including professional services, sales, and management. Most federal and state laws protect employees from a broad range of harms, including discrimination, but do not give the same protections to workers who are independent contractors. Employee protections, such as wage and overtime rules and workers’ compensation benefits, can prove costly to an employer. This creates an incentive to classify workers as independent contractors, even if they do not fit the criteria.

Who Is an Employee?

Various federal and state laws provide tests to determine which workers are employees and which are independent contractors. Certain professionals who offer services directly to the public are sometimes independent contractors, such as doctors, veterinarians, accountants, and public stenographers. However, whether any of these professionals or anyone else is an independent contractor rather than an employee is highly fact-specific.

The general rule used by the Internal Revenue Service (IRS) is that an individual is an independent contractor if the entity that pays them has the right to control only the result of the work, rather than the details of what is to be done or the method by which it should be done. However, before classifying a worker as an independent contractor or an employee, an employer will have to analyze multiple factors. They can be roughly grouped into three categories: behavioral control, financial control, and type of relationship.

Behavioral control includes factors that show whether a business has the right to direct a worker’s performance of job duties. This includes whether the business could direct a worker when and where to do work, what tools or equipment to use, what workers to hire or assist, where to buy supplies, what work should be performed, and in what order the tasks should be completed. It also includes consideration of the business’s training of a worker. Independent contractors usually use their own methods to complete work.

Financial control consists of factors that show whether a business is entitled to control the business aspects of a worker’s job. These considerations extend to the extent to which it reimbursed the worker's business expenses, the extent of the worker’s investment in tools, equipment, or facilities, the extent to which the worker was able to seek out other business opportunities, the extent to which the business paid the worker, and the extent to which the worker could make a profit or loss.

Matters relating to the type of relationship include written contracts describing the intended relationship, whether benefits typically given to employees are given to the worker, the permanency of the relationship, and the extent to which the worker’s services were integral to the company’s business.

What Is the Recourse for Employee Misclassification?

If a worker believes they have been misclassified, there are a number of steps they can take. In some states, workers are permitted to anonymously report companies that employ them if they believe the companies have misclassified them as independent contractors. Most often, however, the issue of employee misclassification arises in connection with a company’s adverse decision in connection with a worker. These can range from termination and discrimination to refusal to compensate a worker for an on-the-job injury, failure to compensate a worker according to minimum wage standards, or failure to give a worker a rest break. The recourse available may be a lawsuit in which the worker alleges misclassification in order to recover benefits to which they were entitled.

For example, if a company failed to pay a worker at least minimum wage and overtime, and they believe that they were misclassified, they can consult an employment lawyer to file a wage and hour lawsuit. They can also contact the Wage and Hour Division of the U.S. Department of Labor to report the violation.

If a worker has been terminated or injured on the job, and the employer misclassified them as an independent contractor, they may be put in a difficult situation. As an independent contractor, a worker cannot collect unemployment benefits, nor can they collect workers’ compensation. However, in most states, they can file for benefits and argue in the application that their employer misclassified them and that they should be eligible. They can also contact the state departments of labor and revenue to report the company.

Last reviewed October 2024