State Trends: Are You Misclassifying Your Independent Contractors?

By Camille BradburyPublished On: January 22, 2025

In the spirit of 1099s that are due to contractors at the end of the month, this is a hot topic of conversation as we prepare for an incoming deregulation of the federal government and more state laws to become enacted.

One of the raising issues comes with misclassifying employees as an independent contractor. Some employers are opting to misclassify employees as independent contractors to avoid the state and federal taxes, but they may be putting their companies at risk.

“I’ve handled like four or five Texas Workforce Commission tax audits on independent contractors, on independent contractor classification in the last two years. In my whole career, I handled one. It’s because states know it’s a great source of revenue for them. So the trend is to look at whether these people are actually independent contractors.” Rachel Ullrich says, partner at FordHarrison.

Questions to Consider When Classifying Contractors

Can they negotiate their pricing?
How much are they getting charged for a particular project?
Are they providing their own equipment?
What degree of control do they have in the work they are performing?
Is the work performed an integral part of the employer’s business? (i.e. if the contractor makes widgets and the company’s business is to make widgets, there is an argument that they are not an independent contractor because they are doing what employees should be doing).
How long have they been working for you? Independent contractors are typically project based and not working for you for an extended period of time.

How to Assess My Risk?

Texas put out a 20-step factor test that can help you determine if your company complies with independent contractor regulations. You’ll want to stay updated on your particular state’s criteria when classifying workers and independent contractors.

If you are misclassifying employees, you are probably paying them on a different pay structure than an hourly rate, so minimum wage and overtime pay requirements can come into play. There’s also job protected leave laws, job protected benefits, unemployment contributions, compensation premiums, etc. that contractors miss out on.

Recommendations

Most importantly, states are focused on ensuring they get their employment tax, not to mention federal taxes that are being avoided hence the uptick in cases. If you are misclassifying workers, it’s important to work with counsel to figure out how to communicate that to your workers without increasing your liability.

There could be an employee morale issue to address so employees don’t feel taken advantage of or that they are missing out on key benefits that should be awarded to them if they had been classified properly.

Experts recommend performing an evaluation under the cloak of attorney client privilege to avoid a case with the IRS. Keep in mind, policies vary based on state jurisdiction or federal jurisdiction and the landscape is shifting, so analyze your current population and build a repeatable process to assess your risk when hiring independent contractors.

The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.