Know Your Rights: Misclassification—Independent Contractors and Employees

Employers sometimes incorrectly call their employees independent contractors instead of employees. This is called misclassification. Employers may misclassify workers as independent contractors because then they do not have to pay payroll taxes, contribute to Social Security, or pay workers’ compensation and unemployment insurance.

What is an independent contractor?
An independent contractor is a worker who provides goods or services to another individual or business through an agreement. The terms of the agreement (which does not have to be written) control the relationship, and the independent contractor treats the other party like a customer or client, rather than an employer. Independent contractors are self-employed, can have multiple clients, and typically find those clients on their own.

How do I know if I am an independent contractor or employee?
There is no clear rule identifying who is an employee and who is an independent contractor because it is based on the specific situation. Some things to look at are who controls the relationship, who controls the work, and whether the worker is economically dependent on the other person or business. If your employer gives you a 1099 tax form, instead of a W-2, they are treating you as an independent contractor. They may also be treating you as an independent contractor if they pay you in cash and don’t take out any taxes.

Why does misclassification matter?
Benefits and procedures are different for independent contractors and employees.