Avoiding Common Employer Pitfalls: Classifying Workers as Independent Contractors vs. Employees

The rise of the gig economy and flexible work arrangements has led to a significant increase in the use of independent contractors across industries. While this model offers agility and potential cost savings, misclassifying workers as independent contractors instead of employees can expose employers to serious legal and financial consequences.

Federal and state agencies—including the U.S. Department of Labor (DOL), the IRS, and state labor departments—have increased enforcement efforts around worker misclassification. At the same time, plaintiffs’ attorneys continue to pursue costly class and collective action lawsuits in this area.

Despite this heightened scrutiny, many employers still fall into common traps when making classification decisions. Below are some of the key mistakes to avoid when determining whether a worker should be classified as an independent contractor or an employee.

1. Relying on Job Titles or Agreements Instead of the Actual Work Relationship

Employers often assume that labeling someone an “independent contractor” in a contract or using a 1099 form related to payments made to these individuals is sufficient. It is not. Courts and agencies look beyond titles and contract language to the actual nature of the working relationship. If the worker is economically dependent on the company and under its control, they may be deemed an employee—regardless of the contract language.

2. Applying a One-Size-Fits-All Approach Across Jurisdictions and Under Various Employment Laws

Worker classification laws vary significantly between across jurisdictions and under different legal frameworks. For instance, California uses the strict “ABC test” under AB 5 for most workers, while the federal DOL uses less stringent test focusing on factors such as control, opportunity for profit/loss, and the permanency of the relationship. Employers must be aware of—and comply with—each standard under the applicable laws of the jurisdiction in which the employer operates or the jurisdiction in which the employee works, depending on the circumstances. A one size fits all approach is generally not acceptable, unless it has been vetted by a legal professional and applies the most stringent relevant legal test.

3. Exercising Too Much Control Over Contractors

True independent contractors should control how they perform their work, including their schedule, tools, and methods. When employers dictate not just the outcome, but also the means and manner of the work, the relationship often veers into employee territory. Excessive supervision, required work hours, or mandatory training may all suggest employee status.

4. Treating Contractors Like Employees in Practice

Contractors who are integrated into the regular business operations—such as being assigned company email addresses, attending staff meetings, or appearing in internal directories—may be viewed as employees. Consistency in treatment is critical: a true contractor typically maintains independents, often works for multiple clients or businesses, and is not integrated into the core operations of the business.

5. Overlooking Ongoing Monitoring and Reevaluation

Worker relationships can evolve over time. A contractor brought in for a short-term project may, over time, become a core part of a company’s operations. Without periodic reassessment, employers risk maintaining outdated classifications that no longer reflect the realities of the working relationship.

Employers should regularly review contractor arrangements—especially when there are changes in job duties, scope of work, duration, or level of oversight.

Key Takeaway for Employers

The legal and financial risks of misclassifying employees as independent contractors are significant. Potential consequences include:

• Wage and hour violations resulting in back pay
• Unpaid payroll taxes and penalties
• Liability for unemployment insurance and workers’ compensation
• Missed benefits contributions
• Penalties, interest, fines, and litigation costs

To minimize these risks, employers should:

• Conduct periodic audits of independent contractor arrangements
• Stay current with applicable federal and state classification standards
• Seek legal counsel when establishing or maintaining independent contractor relationships

Rimon PC’s employment team can help you assess classification risks and implement practical solutions to minimize exposure.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

Tara Humma is a Litigation attorney who focuses her practice on labor and employment matters. Tara has over a decade of experience representing public and private employers of all sizes in states across the country. Tara represents clients in all phases of employment litigation, from initial pleadings, discovery, and motion practice to trial preparation and appeals. Her experience includes a broad range of litigation matters including, but not limited to, claims brought under Title VII of the Civil Rights Act, the Americans with Disabilities Act (ADA) (including accessibility cases), the Family and Medical Leave Act (FMLA), the Fair Labor Standards Act (FLSA), breach of contract cases related to employment contracts and restrictive covenants and various other state and federal employment laws. Read more here.