Contractors are those who perform work for an organization under a contract. This may be an independent contractor or subcontractor; however, when contractors perform work under their own contract, they are still subject to federal regulations, including those related to workplace safety, employment tax obligations, and other risks associated with hiring and supervising employees. The most significant error in selecting the best workforce model is failing to consider the day-to-day operational aspects of each possible model. For example, determining whether a worker will be classified as an employee or an independent contractor can have important implications for employment taxes, FICA, and workers' compensation coverage, as well as for the employer's risk exposure Several of recent enforcement actions demonstrate that misclassifying a worker as an independent contractor when, in fact, they are an employee is not just a matter of record-keeping, but also of how the work is performed. Therefore, before making a decision regarding which workforce structure to use, the following factors should be evaluated: Who determines the schedule for performing the work? Who supplies the necessary tools, equipment, and materials for the work? Who provides the supervision for the work? What type of insurance liability, workers' compensation, etc., do the individuals provide for themselves? Who bears the costs associated with training the individuals? Who has ultimate responsibility for ensuring job site safety?
Employers most often violate federal employment law by misclassifying full-time workers as independent contractors to cut taxes and benefits. Under the economic reality test, control and integration into the core business matter more than contract labels; a clear red flag is a "contractor" working fixed hours under supervision. Companies frequently underestimate IRS and Department of Labor audits, which can result in back taxes, fines, and litigation. Strategically, plan your workforce with employees for long-term, core functions; contractors for specific projects with well-defined deliverables; and temporary workers for short-term workload increases. The wrong choice of model can end in a legal risk or high attrition. Next, federal enforcement is tightening around worker misclassification, non-compete agreements, and transparency in remote work. In response, companies are adapting agreements in some cases and shifting to hybrid workforce models to limit exposure.
Regulated industries face a problem when employment contracts fail to recognize two realities: what they say vs. what they do. I've seen companies call their workers "contractors" yet give them daily directions as if they were employees. There's a risk associated with this disconnect. At the same time, federal guidelines assess whether a worker has control or is economically dependent on the employer, not the title. When workers are supervised, scheduled, and evaluated in the same way as employees, the risk increases. One of the largest risks associated with misclassifying your workforce is the downstream impact. While back pay can be expensive, the long-term consequences of audits and loss of reputation may be even more expensive. When evaluating the overall strategy for classifying my workforce, I assess the level of control, the level of continuity, and the level of compliance risk. If I need structured supervision, I will hire employees to provide it. I use contractors for defined, outcome-based projects. The trend in enforcement is expected to continue, focusing on misclassification from an economic dependency perspective. The best way to avoid surprises is to maintain clear documentation and aligned practices.
Employment contracts most often break down around worker classification, compliance assumptions, and outdated language that fails to reflect modern work models. Misclassification remains the costliest error; the U.S. Department of Labor estimates that millions of workers are misclassified annually, exposing employers to wage claims, tax penalties, and retroactive benefits liability. Strategic workforce decisions should begin with an honest assessment of control, duration, and business dependency rather than cost alone—employees suit core, long-term capabilities, contractors fit specialized or outcome-based work, and temporary workers help manage volatility without structural risk. Many organizations underestimate enforcement momentum, particularly as federal agencies intensify audits around gig work, co-employment, and joint liability. Recent rulemaking and enforcement activity signal tighter scrutiny on "economic reality" tests and pay transparency, pushing contracts to become clearer, role-specific, and compliance-first. Leaders who align contract strategy with evolving labor law and skills planning are better positioned to reduce legal exposure while building resilient, future-ready teams.
Misclassification of employees in the education technology space often begins with positive intent. Entrepreneurs want to provide their workforce with flexibility, but also desire consistency in availability and instruction. I once reviewed a contract between a tutoring service and its tutors that required tutors to work a fixed schedule and prepare a script for each lesson. This model appears to mimic the characteristics of employment rather than independent contracting. One of the largest risks associated with misclassifying employees is exposure to back pay for overtime. Although a small team may not seem likely to result in significant retroactive payments, the cumulative effect of these payments can be substantial. When deciding between employing individuals and using independent contractors, I ask myself one question: Who controls the day-to-day work method? If the company dictates the method and timing of the work, then employees are the better choice. Contractors should be working independently to achieve defined outcomes. Federal agencies continue to scrutinize economic dependence, underscoring the need to align practices and contractual obligations to reduce the likelihood of misclassification.
Many employers make errors in classifying their employees, particularly when determining whether employees are classified as independent contractors. Misclassifications typically occur due to a lack of understanding of the federal rules governing the distinction between independent contractors and employees. If a company misclassifies an independent contractor as an employee without the required elements of such a classification, the company could be held liable for monies owed for payroll taxes and other costs associated with the employee status. Another area where companies commonly fail is in writing employment contracts that lack clear definitions of terms. Employment contracts with vague terms concerning restrictions on competition, the ownership of proprietary information, and confidential information can cause problems among employees. Ambiguity can negatively affect employees' morale by creating conflicting expectations. Strategically, the decision of whether to employ an individual as an employee, independent contractor, or temporary employee should be based upon the operational needs of the business. As a general rule, using employees gives employers greater control and consistency, particularly for tasks essential to day-to-day operations. Employees are also more likely to align with the company's organizational culture and mission than temporary employees or independent contractors. Using independent contractors strategically enables you to perform specialized tasks or projects without committing to full-time employment for individuals who may be needed only for short periods. Temporary employees are employed to assist businesses during peak periods of operation or to fill gaps created by the absences of regular employees. The Department of Labor is actively enforcing provisions of the Fair Labor Standards Act that address employee classifications. There appears to be heightened awareness within the Department of Labor regarding the proper classification of employees. As a result, future employment contracts are expected to include more detailed descriptions of payment structures, hours worked, and employee classifications to minimize exposure to future misclassification claims. Businesses will need to not only remain compliant with existing statutes but also consider emerging statutory requirements, including those that may necessitate periodic reviews and revisions to contracts.
In my experience the most common mistake I see is control. Companies want the tax ease of a contractor but the day-to-day control of an employee. You can't tell a photographer exactly how to shoot and when to be there and then you say they're an independent contractor. That is a fast track to a misclassification law suit. Federal agencies pay close attention to the control of behavior. If you are dictating the how, then you probably have an employee. When I consider the choice between contractor and employee, there is one question that I ask. Do I need to own their time, or just the final image? If I need somebody on the set from nine to five every day in order to build our culture, I hire an employee. If I just need a portfolio to be delivered by Friday, I use a contractor. Looking to the future, I anticipate that the Department of Labor will create new barriers for interpreting gig workers as contractors. They are hardening the "economic reality" test. They are concerned about whether the worker is actually in business for themselves. If a worker is only depending on you for their livelihood, you may soon have to call them an employee, whether your contract says so or not.
Employers frequently mislabel employment contracts by ignoring the tax implications related to the misclassification of workers. As per the current "economic reality" test, courts evaluate the true nature of a worker's status as "self-employed" regardless of how that status was labeled in an agreement. The most frequently overlooked risk is the accumulation of back taxes and benefits owed to a "contractor" when they are misclassified as an employee. From a strategic perspective, employers should hire employees to perform level one functions that produce predictable returns not only to the employer but also to the employee over an extended period of time; whereas, employees should be hired to perform specialized high-cost projects that do not require additional internal management or direction. The most significant enforcement trend anticipated for 2026 is pay transparency as defined by the EEOC. That would require all employers to ensure their internal compensation structure complies with the external job postings to avoid substantial fines for failure to comply with the resulting wage-equity breach under the law.
Misclassification Is the Most Common and Costly Contract Mistake Under federal law, many employers are at risk of violating worker classification rules when it comes to employment contracts. A large number of employers do not adequately consider the risks of classifying employees as either independent contractors or temporary workers in relation to their liability for overtime pay, providing benefits, paying taxes, and respecting collective bargaining agreements. Many contracts simply reference job titles or employer/employee intent as opposed to whether the actual nature of the work being performed is that of an employee. Therefore, the key factor that regulators examine is how the work is actually being performed. Contractors make sense if there is a clear definition of the scope of a project (autonomy), and they will be performing a specific task (project-based). Temporary workers can provide the flexibility needed during a short-term increase in demand, but are generally not a good fit for a long-term gap in staffing needs. One error made by companies when utilising contractors for flexibility is not changing how they manage the contractor relationship. The more control exercised by a company, the weaker the contractor classification becomes. In general, the strategy of a company should be developed in accordance with how it performs, rather than developing how it performs to meet the needs of its strategy.
Classifying your workforce is a strategic supply chain decision, not just filling out an HR form. As we scaled our operations early on, I did not understand how classification would affect our accountability. During peak demand, we hired contractors to provide additional support for order fulfillment. We got short-term results. However, our quality consistency suffered due to a lack of clarity about our oversight role for contractors. I realized that employees are best suited to roles that require high-quality customer experiences and adherence to standard processes and procedures. Contractors are best suited to clearly defined, output-based assignments. Temporary workers are best suited to meet specific needs during defined surge periods. Many executives misunderstand the risk of continuity when using contractors. When the contract and daily supervision do not align, confusion can arise regarding employee rights, including wage exposure. As trends in federal enforcement continue to evaluate the economic realities of work classifications, I ensure that my job structures reflect the level of control and supervision applied to reduce compliance risk.
Freelance contributors are common on creative platforms such as mine. I once witnessed a situation in which a group of freelance contributors was treated the same as full-time employees: they attended the same daily stand-up meetings. They were required to follow a fixed schedule. This creates a classification risk. A title alone does not protect a company. I take steps to minimize risk by: Clearly defining the contributor's scope of work Defining deliverables Limiting supervision Including written provisions that define the contributor's independence If contributors rely on structured oversight and continuous guidance, hiring them as employees is likely the better option. It is imperative to align the company's level of control with the contract's language. Federal scrutiny continues to emphasize how work is performed rather than how it is classified. Establishing clear governance helps strengthen both compliance and trust.