Are You Misclassifying Your Employees?

Like other aspects of employment law, worker classification is a tricky topic. While an independent contractor does not come with all the same expenses for your business as an employee, misclassifying a worker can come with hefty costs. The IRS, U.S. Department of Labor (DOL), and other agencies can levy millions of dollars in fines, depending on the severity of your business’s actions, and the misclassified workers can bring lawsuits.

Before you classify a worker as an independent contractor, you should look closely at the difference between an independent contractor and an employee. The state and federal governments use a variety of criteria to determine a worker’s status, and a contract alone isn’t always enough to determine that someone is an independent contractor.

Why Worker Classification Matters

Worker classification has a major impact on taxes and benefits. Your business’s employees are entitled to workers’ compensation benefits, minimum wage protections, family leave, unemployment benefits, overtime regulations, and other standards. If you offer benefits such as health insurance, employer-sponsored retirement plans, or holiday pay, your employees should generally be eligible.

Independent contractors are generally not entitled to these benefits or protections. Since they are self-employed, they pay employer taxes, Social Security, and Medicare taxes for themselves. It is up to them to provide their own health insurance and other benefits.

At first glance, it seems like a no-brainer for a business to classify as many workers as possible as independent contractors. Your business can avoid many of the expenses associated with employee status. However, if you wrongly classify a worker as an independent contractor, you can run into serious legal and financial trouble, including:

Criminal penalties and liability for wage law violations
Penalties for unpaid employment taxes
Penalties for I-9 violations
Penalties for failure to pay unemployment insurance
Penalties for failure to pay workers’ compensation premiums
Lawsuits for failure to provide employee benefits to the worker
Lawsuits for failure to provide job-protected leave
Anti-discrimination violations
Fines, back pay, and other penalties for failure to provide required notice in the event of mass layoffs or plant closings

You may have heard about the long-running class action lawsuit between food delivery app company Grubhub and 60,000 drivers. GrubHub classified the workers as independent contractors, but the driver who originally filed the suit claimed the company misclassified him and failed to pay him overtime, minimum wage, or reimbursement for job-related expenses. After a decade of litigation with multiple appeals among changing legal standards, GrubHub attempted to settle for $24.7 million in August 2025. However, the judge sent the parties back to the drawing board because the deal appeared to conflict with the enactment of California’s Proposition 22, which did not pass until well after the lawsuit began.

Large delivery app businesses aren’t the only ones vulnerable to legal challenges from worker misclassification. For instance, a federal district court in Pennsylvania recently found that a home health company and its owner and manager were liable for misclassifying nurses and home health aides as independent contractors rather than employees. Among other factors, the way that the company had dictated the nurses’ wage rates, supervised them by visiting job sites and monitoring patient care notes, and instructed them to follow detailed patient care plans all supported their status as employees. The U.S. Department of Labor is now seeking close to $12 million in unpaid overtime and statutory liquidated damages from the defendants.

What Makes Someone an Employee or an Independent Contractor?

determines employee vs independent contractor status in the next section.

An employee is someone you hire to work for your business on a regular basis. They are under the business’s direct supervision and control, and they have an established salary or hourly wage. As their employer, you likely decide their time and place of work and provide training for the job.

An independent contractor is a self-employed individual who is free to accept work or not as they choose. They provide their own working equipment and training. They largely set their own schedule.

How the Government Differentiates Between Employees and Independent Contractors

Federal Standards

The U.S. Department of Labor has regulations on how to analyze whether someone is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). It uses a six-factor economic reality test based on the following factors:

How much does the worker’s opportunity for profit or loss depend on managerial skill? For instance, a worker who negotiates their own pay, decides to accept or decline work, engages in marketing, or hires their own workers is more likely to be seen as an independent contractor.
What investments does the worker make, and what investments does the employer make? A worker who purchases their own tools and/or spends money to market their services is most likely an independent contractor.
How permanent is the work relationship? Someone who has worked continuously for your business for a long time and only works for your business is most likely an employee.
How much control does the employer have over the worker, and what kind of control? For instance, if you require your workers to work from 9 am to 5 pm, that weighs in favor of them having employee status.
Is the work integral to the employer’s business? Someone who harvests produce for a farm is more likely to be an employee, while someone who provides marketing services to the farm is more likely to be an independent contractor.
How much skill and initiative does the worker bring to the business? Independent contractors typically use specialized skills, do not rely on your business for training, and use their skills in a way that indicates their own business initiative.

State Standards

In Washington State, independent contractors are defined in WAC 162-16-230. No single factor determines whether someone is an independent contractor or an employee, but the state does have a set of standards it uses in its consideration. The most important factor is how much the purchaser of the work (or employer) controls how the work is done.

Generally speaking, if you are working with an independent contractor, they most likely:

Control and direct their own work. An independent contractor can choose how they do their work.
Provide their own tools and equipment. In most cases, employers provide the equipment and place of work for employees, but independent contractors provide their own.
Are not supervised closely. Independent contractors are typically less closely supervised than employees, although it depends on the type of work they perform.
Are not as integrated into the business’s regular operations. If the work is an integral, regular part of the business, the person doing it is more likely to be an employee rather than an independent contractor.
Do not have annual paid leave or retirement benefits from the purchaser of work. If you provide benefits such as paid leave or retirement, the worker will most likely be considered an employee.
Are hired for a relatively short period of time. Independent contractors are usually, but not always, brought in for a relatively short time period.
Are paid by the job. Both employees and independent contractors can be paid either by time or by the job, but it’s more common for independent contractors to be paid by the job.
Have more fixed obligations than an employee. An employee is usually free to quit, and they can usually be discharged or laid off without any breach of their employment contract. Independent contractors often have contracts with more fixed obligations.
Have language saying they are an independent contractor in any contracts that apply. Contract language is usually a good indicator of a worker’s status. However, it’s not enough on its own to prove that someone is an independent contractor. If you control how the person does their work and otherwise treat them like an employee, the state may decide they are an employee regardless of what the contract says.

The state also considers tax history and employer records. If you have been paying Social Security tax, unemployment compensation tax, workers’ compensation, or withholding federal income taxes on behalf of the worker, they are likely considered an employee. Whether the worker treats their income as salary or business income on their tax return also matters; an independent contractor is considered self-employed, so their income should be treated as business income.

In Summary: The Differences Between an Employee and an Independent Contractor in Washington State

Employee	Independent Contractor
Has hours, tasks, and methods of work set by their employee	Chooses how and when they work; may accept or decline work
Uses tools and equipment provided by the employer	Provides their own tools and equipment
Is supervised by their employer, often closely	Is less closely supervised by the purchaser of their work than an employee would be
Is entitled to the business’s employee benefits, including any retirement plan, health benefits, and paid leave benefits offered to employees	Is not entitled to employee benefits
Must have tax withholding, Social Security, Medicare, unemployment insurance, and workers’ compensation premiums paid on their behalf	Pays their own Social Security and Medicare taxes; is not entitled to tax withholding, unemployment insurance, or workers’ compensation benefits
Performs regular tasks that are an essential part of the business	Likely works on temporary projects or tasks that are not a core part of the business
Does not spend money to promote their own services or hire their own employees; generally does not use their skills in a way that indicates their own business initiative	May spend money on activities that promote and support their own business, such as marketing their services or hiring their own workers; uses their skills in a way that indicates their own business initiative
May work at a set rate that is pre-determined by the business	Sets their own prices or negotiates their own pay
Likely receives training through their employer; may or may not have specialized skills	Has specialized skills and does not rely on an employer for training

How Your Business Can Avoid Legal Trouble From Worker Misclassification

The best way to avoid lawsuits and penalties is to work with an experienced employment lawyer from the beginning. A lawyer will help you construct contracts that can’t easily be used against you in a lawsuit. They can also advise you on how to structure your company policies and procedures to keep a clear distinction between your employees and your independent contractors.

If someone has already filed a claim against your business, it is even more important to find a practiced employment lawyer. The right lawyer can help defend you from unfair claims around worker classification and related legal issues.

The Anderson Hunter Law Firm helps employers in Snohomish, King, Skagit, Island, and San Juan Counties. We provide routine employment law advice, keep our clients up-to-date on employment law changes, conduct employment handbook audits, and conduct wage and hour audits to identify compliance issues before a government audit finds them. We also defend employers from employment law claims.

Our firm has several experienced employment lawyers who may be able to help your business. Request a consultation today for help with your worker classification questions.

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Are You Misclassifying Your Employees? Legal Differences Between Employees and Independent Contractors in Washington State