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Independent Contractor Misclassification: Explanation and FAQ

A remote worker meets with his colleagues via online video, but has often wondered about independent contractor misclassification.

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If you’ve done contract or freelance work, you may have experienced situations where you felt as though you expected to work like an employee — but without the benefits. With the growth of the “gig economy” anyone from janitors, dock workers, to home health aides are at risk of experiencing independent contractor misclassification. Worker misclassification can be pervasive. It isn’t limited to small businesses or start-ups, as even large companies like Uber have been alleged to have wrongly classified their contractor workforce.

Adopted by some companies as a business strategy, independent contractor misclassification almost always results in wage underpayment and diminished benefits, among other disadvantages. Knowing who an independent contractor is, how that varies from a traditional employee, and what you can do if you feel you’ve unfairly received independent contractor misclassification is central to determining your plan of action for fixing the problem.

What Is an Independent Contractor?

An independent contractor or “freelancer” is a self-employed individual or entity who works as a non-employee for another entity. According to the IRS, the operative factor is that independent contractors are in business for themselves. Here are the common types of independent contractors:

An Individual/Entity Providing Services to Others

An individual business owner who is offering services to other businesses is generally considered an independent contractor.

An Employer Contracting with an Individual/Entity to Provide Work For Their Company

Many companies will pay individuals/entities to perform work for them on a contract basis to avoid the costs and responsibilities that come with hiring employees. However, employers are not allowed to treat contractors as employees. The essential difference is how much control and independence the individual or entity have over the following factors:

  • Behavioral. Is control over how the worker performs their work in the hands of the employer or the worker?
  • Financial. Does the worker or the employer control the business aspects of the job, like how the worker will be paid?
  • Type of relationship. Do written contracts control how the worker will be paid, such as vacation pay or pension plan agreements?

If these factors are controlled by the worker, then it is more likely that this type of job is an independent contractor relationship rather than an employment arrangement. It’s also important to note that state and federal regulations about who exactly constitutes an employee can vary.

What’s the Difference Between an Employee and an Independent Contractor?

Classifying a worker as an employee or independent contractor is more about actual actions the worker and employer may take, rather than their intent. As a non-employee, an independent contractor must pay their own Social Security and Medicare taxes out-of-pocket.

On the employer’s side, they are not required to provide independent contractors certain employment benefits such as health insurance and are ineligible for employer-sponsored retirement accounts that they might otherwise give to their standard employees.

Hiring and retaining contractors is far easier and cheaper than recruiting full-time employees. Even if they’re paid at commensurate rates, contractors tend to be less expensive to retain. The reason for this is clear: They can’t legally demand fringe benefits, paid vacation time, insurance, or other perks that come with full-time status.

How Do You Know If You Are an Independent Contractor?

You shouldn’t be confused about whether you’re a contractor or full-time employee. If you are, you can determine your status a few different ways, including:

  • Tax treatment. Ask the company you’re working for how your taxes are being handled; if you’re required to fill out a W-9 form and withhold your own taxes, you’re a contractor
  • Set wage or payment “per piece?” If you’re being paid for each item completed, as opposed to a set wage, then you’re most likely a contractor
  • Set duration for services. Contractors typically work on six-month or 12-month contracts, which may be renewed as needed

How Common Is Independent Contractor Misclassification and Why Does It Matter?

Independent contractor misclassification is more common than you might think. In fact, 10-20% of workers are misclassified as independent contractors, according to some estimates. It typically goes unnoticed by the worker until a work-related dispute arises.

When an employer classifies a worker as an independent contractor even though they are treating them as an employee, it means that that the employer is not paying that worker’s share of taxes. So all of the income taxes, Social Security taxes, Medicare taxes, and unemployment taxes from that employee are not available in the overall social insurance pot for the broader workforce.

What Should You Do if You’ve Been Misclassified as an Independent Contractor?

If you’ve been misclassified as an employee, you can file an SS-8 Form with the IRS. If you believe that you need the IRS to properly determine your status as either an independent contractor or an employee, this determination usually takes the IRS about six months to ascertain.

What Are the IRS Penalties for Independent Contractor Misclassification?

The allure of contract employees is strong enough to encourage some employers to bend or break the law. It’s not uncommon for smaller, cash-poor companies to require “contracted” employees to work in full-time capacities more typical of an employment relationship.

While this arrangement is not technically illegal, it may invite closer scrutiny from the IRS. Depending upon the rules that the pertinent contractors are required to follow, the IRS or Department of Labor could well deem them to be “extra-legal” full-time employees. As such, the IRS could penalize the employer with back taxes.

You can also file a lawsuit to claim unpaid wages and lost benefits if you feel you have a case against an employer who misclassified you as an independent contractor. If you feel this tactic has been a business strategy and that your employer intends on skirting the law through their actions, you may have a viable 1099 misclassification lawsuit claim.

Unsure Whether You’re Actually an Independent Contractor or Employee?

If you believe you might be subject to independent contractor misclassification, and need the expert advice of a professional to look at the facts of your claim, consider getting a free initial review from an attorney today.

Disclaimer

This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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