Why Worker Classification Matters
Misclassifying an employee as an independent contractor is one of the most common — and expensive — legal mistakes businesses make. The IRS and state labor agencies actively audit worker classification, and penalties can include back taxes, penalties, and benefits owed.
The Key Differences
Behavioral Control
Employee: The company controls how, when, and where work is done.
Independent Contractor: The contractor controls how the work is done. The company only specifies the result.
Financial Control
Employee: The company provides tools, reimburses expenses, and pays a regular wage.
Independent Contractor: The contractor uses their own tools, bears their own business expenses, and can profit or lose money.
Type of Relationship
Employee: Ongoing relationship, benefits provided, work is a key part of the business.
Independent Contractor: Project-based, no benefits, may work for multiple clients.
The ABC Test
Many states use the "ABC test" to determine worker classification. A worker is an employee unless:
- A: The worker is free from control and direction in performing the work
- B: The work is outside the usual course of the hiring entity's business
- C: The worker is customarily engaged in an independently established trade
Protecting Your Business
The best protection is a well-drafted Independent Contractor Agreement that clearly establishes the contractor relationship. Key provisions include:
- Explicit statement that the worker is an independent contractor, not an employee
- Contractor responsible for their own taxes and insurance
- Contractor free to work for other clients
- No benefits provided
- Contractor uses their own tools and equipment
Generate Your Independent Contractor Agreement
DraftDesk generates legally sound independent contractor agreements that help establish the proper relationship and reduce misclassification risk.