Employee or Contractor? Why Misclassification Costs You

TL;DR: Paying someone on a 1099 does not make them an independent contractor. Classification comes down to who controls the work, not what the paperwork says, and getting it wrong can mean back pay, damages, attorney's fees, and lost insurance coverage. If you suspect you have already misclassified someone, review the relationship now and correct it before it becomes a wage, tax, workers' compensation, or employment claim.

"We paid them on a 1099, so they're a contractor." I hear that line more than almost any other when a business owner first asks me about worker classification, and it's almost always wrong. A 1099 is a tax form. It has nothing to do with whether the law actually treats that person as a contractor or an employee, and getting that call wrong can cost far more than whatever you thought you were saving. If you are not sure how your workers are classified, it is worth having an employment law attorney look at the relationship now, before a dispute forces the question.

Why the Label Matters More Than a 1099

One of the most common examples I see involves contractors and landscapers whose workers are paid on a 1099. The business owner assumes that paying someone this way automatically makes the relationship an independent contractor arrangement. It does not. I have seen businesses sued by workers they genuinely believed were properly classified, simply because the paperwork said "contractor" while the day-to-day relationship looked like employment.

That gap between the paperwork and the reality is where the legal exposure lives. A court or an agency investigating a wage claim will look past the 1099 to how the relationship actually functioned. If it functioned like employment, the label on the tax form will not protect the business.

How Classification Is Actually Decided

To oversimplify it a bit, the issue often comes down to control. If the worker is controlled by the company in how, when, and where the work gets done, if the work they perform is part of the company's regular business, or if the worker lacks an independent business of their own, they may be considered an employee regardless of what any agreement says.

This is what business owners get wrong most often. They focus on whether they issued a 1099 or a W-2, whether the worker set their own hours, or whether there was a signed agreement calling the person a contractor. Those details matter, but they are secondary to the control question. A worker who takes direction the way an employee would, who is central to how the business runs day to day, and who has no business of their own is going to be treated as an employee, no matter what the contract says.

What Misclassification Really Costs

The cost adds up faster than most owners expect. Employers can face back pay, liquidated damages, and significant attorney's fees under fee-shifting employment laws, which allow a prevailing worker to recover legal costs from the employer. I have also seen businesses lose insurance coverage or face significantly higher premiums after a misclassification claim, because a claim like this makes insurers see the business as a bigger risk going forward.

Lack of documentation compounds the classification problem. When a dispute arises, whatever paper trail exists (or does not exist) becomes central to how the claim plays out, whether it touches classification, performance, or both.

Getting Contractor Agreements Right

None of this means every contractor relationship is risky. There are plenty of situations where a contractor arrangement is entirely appropriate, even when it looks risky at first glance. A plumber hired to repair a landscaping company's office, for example, is more likely to be a legitimate contractor because plumbing is not part of the landscaping company's regular business, and the plumber runs an independent business of their own.

The difference comes down to the same control test: is the work part of the company's regular business, and does the worker run an independent business of their own? A written agreement matters, but it is not what decides the question, and getting an attorney to evaluate the relationship against that test is worth doing before a dispute forces the answer on you. If you are bringing on new workers for the first time, it is also worth reviewing our guide to the legal side of hiring your first employees, which covers classification alongside the other paperwork and policy decisions that come with your first hires.

When and How to Reclassify

My advice for someone who suspects they may have already misclassified someone is simple: do not ignore the issue. Review the relationship now, applying the control test above, and correct the classification before it turns into a wage claim, a tax issue, a workers' compensation dispute, or an employment claim. Catching and fixing a misclassification proactively is almost always less costly, and less disruptive, than responding to a claim after the fact.

Key Takeaways

• A 1099 does not make someone a contractor. What matters is the actual working relationship, not the tax form used to pay them.
• The control test decides it: who directs the work, whether it is part of the company's regular business, and whether the worker runs an independent business of their own.
• Misclassification can mean back pay, attorney's fees under fee-shifting laws, and higher insurance premiums or lost coverage.
• Most classification problems trace back to missing documentation, especially around performance issues, accommodation requests, and policy enforcement.
• A contractor arrangement can be entirely legitimate. Run it through the control test instead of assuming from the paperwork.

If any of this sounds like a relationship you have right now, it is worth a closer look before it becomes a problem. Schedule a consultation with our team and we can review the classification with you and help you correct it before it turns into back pay, penalties, or a claim.

About the author: Jacob Gilbert, Esq. is an Associate Attorney at Company Counsel focusing on employment law, including worker classification, wage and hour disputes, and workplace claims.