The modern workplace is evolving. Hiring workers isn’t as simple or straightforward as it once was, with companies bringing on different classes of workers to fill organizational gaps. Businesses face growing legal challenges as modern workplaces evolve, with remote work, project-based roles, and independent contracting becoming more common.
While flexibility in hiring offers advantages, it also creates risks when determining whether a worker is an employee or an independent contractor. Misclassification can lead to significant legal and financial consequences, including back pay claims, tax penalties, and government audits. Compliance with federal and state laws protects Idaho and Washington businesses from unnecessary liability and keeps operations running smoothly.
How Do You Classify an Independent Contractor?
Independent contractors (1099 workers) work under agreements that define the scope of their services rather than as part of an ongoing employer-employee relationship. These workers set their own hours, use their own tools, and often operate under business names of their own. Independent contractors:
- Charge fees for their services rather than receiving wages.
- Are engaged only for the time required to complete a project.
- Have control over how they perform their work.
- Are responsible for their own income taxes, Social Security, and Medicare contributions.
- Do not receive company-sponsored benefits.
When a company hires an independent contractor, it controls only the outcome of the work—not how the worker accomplishes it.
Misclassification can be costly. Federal and state agencies, including the IRS, the Idaho Department of Labor, and the Washington Department of Labor & Industries, examine the level of control a company exerts over a worker to determine their classification.
Classifying W-2 Employees
Employees, by contrast, operate under a company’s direct control and work as an integral part of its operations as a team. An employer dictates work schedules, provides tools or materials, and supervises day-to-day performance. Unlike independent contractors, employees:
- Receive wages subject to automatic tax withholding and are eligible for overtime pay.
- Are employed continuously rather than per project.
- Depend on the employer for their primary source of income.
- Are protected under state and federal employment laws, including the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA).
Employers must withhold and pay payroll taxes for employees, including contributions to Social Security, Medicare, and unemployment insurance. Proper classification avoids disputes over wages, benefits, and regulatory compliance.
The Costs of Misclassifying Employees
Misclassification may seem like an administrative issue, but the consequences go far beyond paperwork errors. Companies that misclassify employees as independent contractors may face:
- Back pay claims, including overtime wages.
- Liability for employee benefits such as health coverage, stock options, and retirement contributions.
- Workers’ compensation and disability insurance costs.
- Unpaid payroll taxes, penalties, and interest.
- Liquidated damages and civil monetary fines.
State and federal agencies conduct audits that focus on employment status. The IRS applies a strict test for worker classification. Failing to properly classify workers can lead to years of financial liability, legal disputes, and disruptions in business operations.
Where Most Employers Get In Trouble
For many businesses, the concepts above are old hat. They’re the standard IRS independent contractor test that everyone knows. But here’s the catch: That’s not where most businesses get in trouble. The biggest trip-up most employers face is the little-known state standard.
The issue can be summed up as follows: Does the person doing the work provide the services for which your company exists? If the answer is yes, then chances are, you can have workers classified as independent contractors all day long, with every possible protection in place, and still face huge fines from state agencies like your state worker’s comp division or your state unemployment office.
For example, let’s say a bookkeeping company hires a bookkeeper to help enter data and service client accounts. The bookkeeper has their own hours, their own laptop, their own separate business with their own separate clients, and may even be working on a temporary basis. But, is that bookkeeper providing the services for which the company exists? Well, it’s a bookkeeping company, so yeah. Most state agencies will say that person is your employee, not your independent contractor. If and when they decide to file a worker’s comp claim (carpal tunnel is a surprisingly common worker’s comp claim), or if they decide to file for unemployment, you’ll be on the hook not only for their benefits, but also for potentially huge fines and penalties.
Get Employee Classification Right in Your Organization
Employee misclassification is a layered issue that compounds the longer you fail to properly classify workers and the higher the number of misclassified workers within your company. Idaho businesses should regularly review worker classifications and ensure the proper training of hiring managers to avoid costly penalties. At Skepsis Legal Solutions, we help businesses in Idaho and Washington establish sound hiring practices, draft enforceable contracts, and minimize risk. Explore our legal packages and book a consultation to ensure your company remains compliant and protected from modern, evolving challenges in classifying your hires.
