The Label Used by a Business and a Worker Does Not Control. 

When a business and a worker both agree that the worker is an independent contractor, that means the worker is an independent contractor, right? Wrong. Does a written “independent contractor agreement” signed by the worker mean that the worker is an independent contractor? Not if there is no other support that the worker is an independent contractor. If a worker is remote, does that suggest that they are an independent contractor? Not always. As remote work has become more common, in many states remote or teleworking is not a significant factor in assessing whether a worker is an independent contractor or an employee.  If an attorney advised my business that a worker was an independent contractor years ago, I can rely on that, right? Not if the relationship between the worker and business has changed, even slightly. 

Legally, the label that a business and a worker apply to their relationship has little significance. Some courts have even ruled that a worker is an employee despite the business and worker agreeing that the worker is an independent contractor, the business issuing 1099s, and the worker filing taxes as a self-employed independent contractor. 

Rather than rely on the label applied by a business and a worker, the tax treatment of the worker, standard industry practice, or the existence of a written agreement that refers to the worker as an independent contractor, businesses should closely analyze their interactions and relationships with workers. 

Why Does Worker Misclassification Matter?

Worker misclassification can have negative consequences for businesses, the officers and principals of businesses that employ misclassified workers, and workers. 

Impact on Businesses

A worker who believes that they have been misclassified as an independent contractor may report the suspected misclassification to the Internal Revenue Service or their state’s labor department. A report to either may result in investigation into the business by a government entity. Investigations are burdensome on a business’s resources and divert attention from other important matters. An investigation may also result in a finding the business is responsible for unpaid federal, state, and local taxes; unpaid minimum and/or overtime wages; and/or unpaid insurance premiums for that worker. Businesses may be responsible for interest on any unpaid amounts. The IRS and state labor departments can also impose additional potential penalties against businesses who have misclassified workers.  

Impact on Officers and Principals 

In some states, officers and principals of businesses may face negative consequences if an employee is misclassified as an independent contractor.  For example, Washington’s wage payment laws provide that in certain situations, officers and principals of businesses who have withheld wages from an employee are individually liable for twice the amount of withheld wages, plus reasonable attorney fees incurred by the employee in bringing a civil suit for the withheld wages. As a result, misclassified Washington workers who were not paid the legal minimum wage could bring a lawsuit against the business, and any officers and principals of the business, for double the amount of unpaid wages, plus their reasonable attorney’s fees. This poses a significant risk of individual financial liability for owners and principals of businesses.

Impact on Workers

A worker misclassified as an independent contractor when they are really an employee is often harmed by the misclassification. They may be denied certain protections and benefits that employees are entitled to, such as minimum wage, overtime, family and medical leave, worker’s compensation, unemployment insurance, and other protections and benefits available under other federal, state, and local laws. Employees misclassified as independent contractors also suffer economically because they assume the full financial cost of Social Security and Medicare, which would otherwise be split evenly between a business and an employee. 

Differences Between an Independent Contractor and an Employee.

The only sure way for a business to be certain of worker classification is to assess the interactions and relationship within the context of the relevant state’s test for determining whether a worker is an independent contractor or employee.

While every state has different tests for analyzing whether a worker is an independent contractor or employee, these tests typically consider the degree of control that the business has over the worker compared to the independence of the worker. Most states don’t rely on a single factor under the worker classification test. However, in some states, certain factors may be given greater weight than others. 

While the factors considered by state tests vary, the following general characteristics are considered by many states when assessing whether a worker is classified as an independent contractor or employee. 

General Characteristics of Employees Under State Worker Classification Tests

• Employees usually work full-time for a single employer. 
• Employers typically set and control the hours the employee works and where work is done. 
• Work done by an employee typically covers a wide variety of duties and tasks. The work cannot be outsourced to others and must instead be done by the employee. 
• Employers may provide training to the employee on how to perform the job.
• Employers provide employees with the tools and supplies needed to perform the work. 

General Characteristics of Independent Contractors Under State Worker Classification Tests

• Independent contractors operate as independent business, even if that business is just one person. This means that an independent contractor’s opportunity for profit or loss depends on their own efforts. 
• Independent contractors often market themselves and their services.
• Independent contractors usually have more than one client, whether that be concurrently or in succession. 
• Independent contractors often set their own hours and determine where work will be performed. 
• While a business may provide general parameters for a project or task that an independent contractor should comply with, independent contractors typically control how the project or task is completed. 
• The scope of an independent contractor’s work is usually clearly defined to a limited scope. 
• Independent contractors often have freedom to control if they use others to help them complete a project or task, or even subcontract out portions of a task or project. 
• Independent contractors usually receive no training from employers. 
• Independent contractors often bring their own specialized expertise to a project or task.
• Independent contractors usually provide their own tools and supplies needed to perform the work.

What Can a Business Do to Prevent Misclassification of Workers?

It can be complicated to assess whether a worker is an independent contractor or an employee. Businesses wishing to employ workers should meet with an attorney to discuss their business, the type of work that the worker will perform, how the work will be performed, and other facts about the relationship between the business and the worker. An attorney can then provide guidance to the business on the correct worker classification and, if possible, how the business can shape the work to be performed and/or the relationship with a worker so that the desired worker classification can be achieved or maintained.