Introduction
This checklist will assist in-house counsel, private practice lawyers, and human resource departments in determining whether members of their workforce (workers) and prospective workers have, or will have, employee status or independent contractor status.
Misclassifying an employee as an independent contractor can be a major liability for organizations, exposing them to potential lawsuits, penalties, back taxes, and audits.
This checklist considers the various factors that are relevant when assessing employment status and will assist organizations to assess a worker’s employment status.
This checklist covers the following steps:
- Understand why it is necessary to determine whether workers are employees or independent contractors
- Understand the difference between employees and independent contractors
- Determine whether a worker is an employee or an independent contractor
The checklist is presented as a list of requirements that can be checked off as they are addressed. At the end of each step, there are explanatory notes corresponding with each requirement in the checklist.
For further information on this topic, see How-to guides: Overview of US employment law and How to draft an employment contract.
Step 1 – Understand why it is necessary to determine whether workers are employees or independent contractors
| No. | Requirement |
| 1.1 | Tax implications of employee versus independent contractor status |
| 1.2 | Other implications of employee versus independent contractor status |
| 1.3 | Consequences of misclassifying an employee as an independent contractor |
Step 2 – Understand the difference between employees and independent contractors
| No. | Requirement |
| 2.1 | Consider the definition of an employee |
| 2.2 | Understand common law employees |
| 2.3 | Understand statutory employees |
| 2.4 | Understand independent contractors |
| 2.5 | Understand the special considerations and typical problems in defining employees versus independent contractors |
| 2.6 | Consider the impact of state laws |
Step 3 – Determine whether a worker is an employee or an independent contractor
| No. | Requirement |
| 3.1 | Consider behavioral factors |
| 3.2 | Consider financial factors |
| 3.3 | Consider the type of relationship |
| 3.4 | Document the factors used to determine employee versus independent contractor status and use the appropriate agreements and forms |
| 3.5 | Consider using IRS Form SS-8 as an alternative to determining employee versus independent contractor status |
Explanatory notes
Legal framework
Whether an individual is an employee or an independent contractor is a matter of both state and federal law. Although the United States Supreme Court has held there is no single test for such a determination, the Internal Revenue Code, the Family and Medical Leave Act 1993 (FMLA), and the Fair Labor Standards Act 1938 (FLSA) all provide guidance on determining whether an individual is an employee or an independent contractor. While an individual may not qualify as an employee under federal law, state law may differ and impose additional requirements on the employer.
The determination of employee versus independent contractor should not be taken lightly. Tax consequences, benefits, state and federal withholding requirements, and more all depend on a proper determination. A wrong determination that is later challenged or adjudicated may have long-lasting consequences to both the organization and worker.
Step 1 – Understand why it is necessary to determine whether workers are employees or independent contractors
1.1 Tax implications of employee versus independent contractor status
The Internal Revenue Service (IRS) states that:
Employers must withhold and deposit income taxes, social security taxes and Medicare taxes from the wages paid to an employee. Additionally, employers must also pay the matching employer portion of social security and Medicare taxes as well as pay unemployment tax on wages paid to an employee. Generally, employers do not have to withhold or pay any taxes on payments to independent contractors.
To comply with IRS requirements, organizations must ensure that they have properly determined whether an individual undertaking work for the organization is an employee or an independent contractor. Individuals who provide services to other businesses are generally considered self-employed independent contractors for tax purposes, while business owners hiring or contracting with other individuals must determine if those individuals should be categorized as employees or independent contractors.
1.2 Other implications of employee versus independent contractor status
1.2.1 Family Medical Leave Act (FMLA)
The federal Family and Medical Leave Act allows eligible employees who work for employers with 50 or more employees, to take up to 12 weeks of unpaid leave in a single 12-month period:
- on the birth, adoption, or placement of a child;
- to care for a family member with a serious medical condition; or
- for the employee’s own medical condition.
Employees are entitled to return to their former jobs after the completion of their leave. Many states also have leave laws that may provide broader coverage. Independent contractors are not entitled to take FMLA.
1.2.2 Fair Labor Standards Act
The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for employees. Independent contractors are not covered by the FLSA, and their pay is set by mutual agreement between the employer and the independent contractor.
1.2.3 Workers’ Compensation Insurance
State workers’ compensation laws provide insurance coverage for employees who are injured on the job, or whose injuries arise out of the course and scope of their employment. While state workers’ compensation laws vary, independent contractors ae generally not covered by workers’ compensation. States will use varying tests and have varying definitions of employee or independent contractor for workers’ compensation purposes.
For example, in Oregon, the statutory definition of an 'independent contractor' for workers’ compensation purposes is:
a person who provides services for remuneration and who, in the provision of the services:
- Is free from direction and control over the means and manner of providing the services, subject only to the right of the person for whom the services are provided to specify the desired results;
- Except as provided in subsection (4) of this section, is customarily engaged in an independently established business;
- Is licensed under ORS chapter 671 [architects; landscape professions] or 701 [construction contractors] if the person provides services for which a license is required under ORS chapter 671 or 701; and
- Is responsible for obtaining other licenses or certificates necessary to provide the services.
1.3 Consequences of misclassifying an employee as an independent contractor
Misclassification of an employee as an independent contractor can lead to liability for past-due employment taxes for the organization, as well as liability for the worker for their share of Federal Insurance Contributions Act taxes, and back wage liabilities (covering unpaid overtime and minimum wage). The $175 million settlement by Uber and Lyft in 2024 for alleged driver misclassification underscores these risks. If grossly negligent, fines, penalties, and interest may be added as well.
In addition, misclassification can incorrectly entitle or deny to an individual the employee protections of the FLSA. Employers who have failed to recognize the status of an employee will be subject to financial penalties and will be required to pay unpaid withholding taxes.
As part of efforts to address misclassification of employees, the Wage and Hour Division (WHD) of the US Department of Labor published a final rule, effective March 11, 2024, revising its guidance on how to analyze whether a worker is an employee or independent contractor under the FLSA. The new rule adopts an ‘economic realties’ test that considers the following factors:
- opportunity for profit or loss depending on managerial skill;
- investments by the worker and the potential employer;
- degree of permanence of the work relationship;
- nature and degree of control over the work;
- extent to which the work performed is an integral part of the potential employer’s business; and
- skill and initiative.
The above factors are not exhaustive, and any other relevant factors may be considered in determining whether the worker is economically dependent on the employer.
The final rule tightens the criteria for classifying workers as independent contractors, thereby increasing the risk of misclassification for employers. It is crucial to note that this final rule applies specifically to the FLSA. State laws, such as Massachusetts' ABC test, often employ stricter standards for independent contractor classification.
New Jersey's Unemployment Compensation Law (N.J.S.A. 43:21-19(i)(6)) follows the same ABC test, which establishes whether a worker qualifies as an independent contractor or an employee for the purpose of unemployment benefits. Under this test, a worker's services are presumed to be employment unless the hiring entity can affirmatively prove that the individual meets all three strict conditions:
that the worker is free from control or direction over the performance of the work, both by contract and in fact;
that the service is performed either outside the employer's usual course of business or is performed outside all of the employer's places of business; and
that the individual is customarily engaged in an independently established trade, occupation, profession, or business that exists separately from the employer's business.
Furthermore, other federal agencies like the IRS (using an 11-point test) and the EEOC (using a right-to-control test) have their own distinct criteria. Compliance with one classification standard does not guarantee compliance with others; employers must assess adherence to each relevant test.
Given the growing reliance on freelance workers in the US, the potential for misclassification is escalating. Employers aiming to lower payroll costs by engaging independent contractors should exercise caution under the new final rule to mitigate the risk of substantial lawsuits and fines.
On May 1, 2025, the Department of Labor’s WHD issued Field Assistance Bulletin No. 2025-1 to provide additional guidance on applying the March 2024 final rule for determining employee versus independent contractor status under the FLSA. The bulletin reaffirms that the 2024 rule remains in effect and continues to rely on the economic realities test, which considers multiple factors such as the worker’s opportunity for profit or loss, investments, permanence of the relationship, control, the integral nature of the work, and skill or initiative.
The WHD clarified that no single factor is determinative and that all factors must be weighed collectively to assess the economic dependence of the worker on the employer. The bulletin also emphasizes that enforcement agencies will focus on the totality of the circumstances when investigating potential misclassification and encourages employers to review their existing contracts, working arrangements, and documentation to ensure compliance.
Step 2 – Understand the difference between employees and contractors
2.1 Consider the definition of an employee
There are two types of employee:
- common law employees (the most common type of employee); and
- statutory employees (a special category of employee created by statute for the purposes of Social Security and Medicare taxes).
2.2 Understand common law employees
Whether or not a common law employer-employee relationship exists depends on which party controls the relationship and the services performed. The more control exhibited by the organization over the worker, the more likely it is that the worker qualifies as a common law employee. Organizations should consider the following common law rules provided by the IRS (considered in detail in step 3 below).
- Behavioral – does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial – are the business aspects of the worker’s job controlled by the payer? These aspects include things such as how the worker is paid, whether expenses are reimbursed, who provides the tools, supplies, etc.
- Type of relationship – are there written contracts or employee-type benefits (ie, pension plan, insurance, vacation pay, etc)? Will the relationship continue and is the work performed a key aspect of the business?
2.3 Understand statutory employees
According to the IRS, ‘If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes.'
Statutory employees include those who fall within the four categories below and satisfy the three conditions (also listed below) required for Social Security and Medicare tax withholdings. Statutory employee categories include the following:
- drivers who are either a business agent or paid on commission on behalf of the business to distribute food or beverage products (excluding milk), or dry cleaning, or laundry;
- life insurance sales agents who work full time for a business;
- any individual who works from home and who follows the employer’s specifications for the work and uses materials or goods supplied by a business, with the completed product to be returned to that same business; and
- salespeople, including those who travel full time, who work selling goods or merchandise for use in business operations.
In addition to falling into one of the categories above, the individual must also qualify for Social Security and Medicare withholdings in order to be considered a statutory employee. To qualify for such withholdings, the following three conditions must be met.
- The relationship between the business and the employee should contractually state or imply that the services are to be performed by the individual and not an associate or other person. The contract may be written or verbal.
- The individual should not have a substantial investment in the equipment and property used to perform the services. Note that the individual’s personal means of transportation is not considered a substantial investment.
- The individual is to perform services on a continuing basis for the business.
2.4 Understand independent contractors
2.4.1 Independent contractors
Independent contractors, unlike employees, are those who offer their services to the public and are engaged in an independent profession, trade, or other business.
2.4.2 Statutory nonemployees
Statutory nonemployees are defined by the Internal Revenue Code. The term includes three categories of professionals: direct sellers, licensed real estate agents, and companion sitters in specified circumstances. Absent a contract or other factors pointing to an employee-employer relationship, such individuals are generally treated as self-employed, independent contractors for federal tax purposes.
2.5 Understand the special considerations and typical problems in defining employees versus independent contractors
The determination of whether an individual qualifies as a common law employee or is an independent contractor can prove frustrating and time-consuming. The analysis is fact-intensive and the results of that analysis can vary widely, even among those workers engaged in a similar purpose. The considerations are set out in detail at step 3.
Note that although a contract may state that the relationship is an independent contractor agreement, such contracts or statements are not conclusive.
Scenarios that may give rise to particularly difficult employment status determinations include the examples below.
- Trainees and students – trainees and students usually work for an organization on a temporary basis. Although they may qualify as employees for the purposes of workers’ compensation insurance coverage, such workers may also be unpaid interns working for academic credit. Unpaid interns are not considered employees for the purposes of the FLSA.
- Hybrid workplace and work-from-home arrangements – previously, work-from-home arrangements generally only existed in independent contractor relationships. However, due to the COVID-19 pandemic and the subsequent rise in hybrid workplaces, organizations must now carefully consider which party controls how and when the work is performed and conduct a fact-intensive inquiry to determine if an employee-employer relationship exists.
2.6 Consider the impact of state laws
In addition to the tests for common law employees set by federal law, some states have passed laws setting out slightly different tests for a common law employee. Organizations should familiarize themselves with the laws in each jurisdiction in which they do business.
2.6.1 California ABC Test
California law applies the so-called ABC test. Under this test, a worker is regarded as an employee unless all three of the following conditions are met:
- the worker is free from the control and direction of the employer in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- the worker performs work that is outside the usual course of the employer’s business; and
- the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Unless a statutory exception applies, the ABC test applies to the independent contractor analysis in the context of wage and hour, workers’ compensation, and unemployment insurance laws. For exceptions, see, Cal. Labor Code sections 2775-2787.
Step 3 – Determine whether a worker is an employee or an independent contractor
As noted above, in considering whether a worker is an employee or an independent contractor, businesses should consider the worker’s degree of control and independence by looking at the three categories set out by the IRS: behavioral, financial, and type of relationship (see 2.2). Note that as statutory employees are a clearly defined category of employee, the analysis below is focused on establishing the difference between common law employees and independent contractors.
It is important to remember that there is no one factor that is dispositive, and there may be reasons for an independent contractor and an organization to handle certain aspects of their relationship in a manner more akin to the employer-employee relationship. For example, while contractors typically choose when and where to do the work, a contractor who needs to review confidential or sensitive documents may be asked to perform that review at the headquarters of the business, and to do it at a time when personnel are available for questions or discussion as needed.
3.1 Consider behavioral factors
Consider whether the worker has previously been, and will in the future be, free to control their performance of the services rendered. Remember that the more control the organization has over the services, the more likely the worker is to be considered an employee.
| Factor | Employee | Contractor |
| Schedule | Determined by employer | Determined by worker |
| Place where work is done | Determined by employer | Determined by worker |
| Training | Provided by employer | Worker already trained |
| Order or process | Employer determines order in which work is done | Worker determines order and process of doing work |
| Assistance | Employee does not hire assistants without approval | Contractor free to choose assistants |
3.2 Consider financial factors
Consider whether the organization controls the business and financial aspects of the worker’s job. Again, more control gives rise to an inference that the worker is an employee.
| Factor | Employee | Contractor |
| Pay | Regular payment at specified intervals | Lump sum or commission, usually upon completion of services |
| Reimbursement for expenses | Employer reimburses | Expenses paid by worker |
| Investment by worker | No investment, beyond education to qualify for position | Investment in tools, equipment, and education |
| Profit or loss | Does not realize a profit or loss, but is paid wages | May realize a profit or a loss on any job |
| Marketing | Usually not free to market services to others | Free to market services to others |
| Tools and supplies | Provided by employer | Provided by worker |
3.3 Consider the type of relationship
The relationship between the parties considers how, as a practical matter, the parties regard their relationship. It is very common for organizations to prefer to label workers as independent contractors, but the day-to-day realities of the relationship may lead to other conclusions.
| Factor | Employee | Contractor |
| Written agreement | Not necessary, although there will often be a written employment contract in place. | Contractors usually have written (not verbal) agreements setting out their status |
| Employee-type benefits (eg, insurance, pension plan eligibility, etc) | Provided, if offered by employer to its employees in general | Ineligible |
| Continuing relationship | Relationship of indefinite duration | Contractor is hired for a specific job or project |
| Services key part of business (ie, what the business sells to the buyers) | Yes | No |
3.4 Document the factors used to determine employee versus independent contractor status and use the appropriate agreements and forms
Document the factors used to determine whether a worker is an employee or an independent contractor. This could be through the creation of a simple checklist or may be more labor intensive. The key point is to document the consideration of the relationship and the facts leading to the conclusion about the status of the worker, in case an issue should arise, or an IRS audit occur.
3.5 Consider using IRS Form SS-8 as an alternative to determining employee versus independent contractor status
After an internal review, if the nature of the relationship remains uncertain, the IRS may be asked to determine the worker’s status. Such a request is submitted through Form SS-8 and is particularly useful if there are multiple workers engaged in similar fact-specific scenarios. Submission of the form may also be used to show the IRS that the business is attempting in good faith to determine whether a worker is subject to federal tax withholdings.
Additional resources
IRS Topic No. 762, Independent contractor vs. employee
IRS, Independent contractor defined
US Department of Labor, Fact Sheet #13: Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA)
US Department of Labor, Fact Sheet #14: Coverage Under the Fair Labor Standards Act (FLSA)
US Department of Labor, Fact Sheet #28: The Family and Medical Leave Act
US Department of Labor, Opinion Letter FLSA2019-6
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How to protect trade secrets in the employment relationship
How to develop a whistleblower policy and reporting program
How to use arbitration agreements in employment
How to prepare for an Occupational Safety and Health Administration (OSHA) inspection
How to comply with the unemployment insurance program
Overview of workplace harassment
How to understand and comply with wage and hour laws
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Employee drug testing
Terminating the employment of an at-will employee
Drafting a non-compete agreement
Developing an Equal Employment Opportunity Commission (EEOC) compliant policy
Determining Family and Medical Leave Act eligibility
Determining whether employees are exempt from wage and hour laws
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