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Employee or Independent Contractor? The Role May Have Changed Even If the Contract Didn’t

  • Todd Nurick
  • 1 day ago
  • 11 min read

Business attorney reviewing employee or independent contractor status with company leadership
Business attorney reviewing employee or independent contractor status with company leadership

Your company hires someone for a short project. The person sets their own schedule, uses their own equipment, serves other clients, and sends an invoice when the work is finished. Two years later, the same person attends daily staff meetings, works regular hours, reports to a company manager, uses the company’s systems, performs the same work as employees, and depends on the company for nearly all their income.


The agreement may still call the person an independent contractor. The working relationship may be saying something else.


Employee or Independent Contractor status isn’t determined by the title the company chooses, whether the worker formed a Limited Liability Company, (LLC), or whether the company issues a Form 1099 instead of a Form W-2. The answer depends on the actual relationship, and the legal test may change depending on the law, jurisdiction, and industry involved.


That makes worker classification something businesses should revisit, not a decision they make once and file away. The timing is especially relevant now. In February 2026, the United States Department of Labor, (DOL), proposed replacing its 2024 independent-contractor rule with a different federal analysis that would place greater emphasis on control and the worker’s opportunity for profit or loss. The proposal isn’t yet a final rule, but the change in direction is another reminder that the legal framework continues to move.


Todd Nurick of Nurick Law Group, LLC is a Pennsylvania and New York business attorney with approximately 30 years of civilian business law and litigation experience and a former Army officer. As Fractional General Counsel and Outside General Counsel, he helps businesses evaluate employment relationships, independent-contractor agreements, workplace policies, contracts, risk management, and the broader legal needs an internal legal department would ordinarily handle.


Employee or Independent Contractor isn’t simply a business preference

There are legitimate business reasons to use both employees and independent contractors. A company may need an employee because it wants continuity, availability, training, supervision, integration with the team, and control over how the work gets done. It may need an independent contractor for specialized expertise, a defined project, temporary capacity, or work that can be completed independently without day-to-day management.


The company can choose how it wants to structure a position. It can’t simply choose the legal classification without making the actual relationship fit.


The Internal Revenue Service, (IRS), looks at evidence of behavioral control, financial control, and the nature of the parties’ relationship when determining status for federal employment-tax purposes. No single label or document resolves the issue. The IRS states that the substance of the relationship governs, even when the parties call it something else.


Federal wage-and-hour law uses an economic-reality analysis focused on whether the worker is economically dependent on the business or is genuinely operating a business of their own. State unemployment, workers’ compensation, wage-payment, discrimination, tax, and industry-specific laws may use other standards. That means a worker could potentially be treated one way under one law and differently under another. There isn’t one universal test that answers every classification question.


Employee or Independent Contractor agreements still matter, but they don’t control the answer

A written agreement is obviously important. It should describe the services, compensation, term, deliverables, expenses, ownership of work product, confidentiality, insurance, indemnification, termination rights, authority, and whether subcontractors may be used. It should also explain that the contractor controls the method and means of performing the work when that is actually true.


The agreement can help document the intended relationship. It can’t rescue a contractor classification that the business ignores in practice. Pennsylvania’s unemployment-compensation guidance makes that point directly. For those purposes, a paid worker is presumed to be an employee unless the business establishes both that the worker is free from control or direction and that the worker is customarily engaged in an independently established trade, occupation, profession, or business. Pennsylvania also states that a written agreement doesn’t control the worker’s status.


Calling someone a contractor while managing the person like an employee creates the worst of both worlds: the company may give up some of the practical benefits of a true contractor relationship while keeping the legal exposure associated with an employee.


Why businesses should reevaluate worker classifications

Jobs change, as you know. A contractor may begin with one project and gradually become part of the company’s regular workforce. A part-time role may become full-time. A consultant may stop serving other clients. A department may begin assigning the person’s hours, methods, priorities, and daily responsibilities. Someone hired for specialized work may start performing the company’s ordinary business operations.

None of those developments automatically changes the classification by itself. Together, they may change the relationship substantially.


A classification review is particularly useful when:

  • a contractor has worked with the company continuously for a long period;

  • the company controls when, where, or how the person performs the work;

  • the worker needs approval for time away;

  • the worker attends the same mandatory meetings as employees;

  • the company provides most of the worker’s tools, equipment, software, or training;

  • the worker performs a central part of the company’s regular business;

  • the company restricts the worker from serving other clients;

  • the worker is paid by the hour, week, or month rather than by project or result;

  • the worker supervises employees or represents the company to customers;

  • employees and contractors perform substantially the same job;

  • the worker no longer appears to operate an independent business;

  • the original agreement no longer matches what happens in practice.


The review shouldn’t be limited to relationships that already look suspicious. It can also confirm that a contractor classification remains appropriate and identify documentation that should be improved before anyone challenges it.


What a company gains by using employees

Employees generally make sense when the company needs to direct both the result and the way the work is performed. An employee relationship can give the company greater ability to establish schedules, require training, assign changing responsibilities, supervise performance, enforce workplace procedures, integrate the person into a team, and expect continuing availability.


Employees can also provide continuity. They may develop deeper knowledge of customers, systems, products, culture, and internal operations. The company may find it easier to build accountability and long-term institutional knowledge with people who are clearly part of the organization. That control comes with obligations.


Depending on the applicable laws and the company’s size and location, employee status may involve:

  • payroll withholding and employment taxes;

  • minimum-wage and overtime requirements;

  • unemployment-compensation contributions;

  • workers’ compensation coverage;

  • wage-payment rules;

  • employee-benefit eligibility;

  • leave and accommodation obligations;

  • workplace notices and recordkeeping;

  • anti-discrimination, harassment, and retaliation protections;

  • onboarding, discipline, and termination procedures.


Not every employment law applies to every employer or employee. Coverage thresholds, exemptions, job duties, compensation, and location all matter. Still, a company shouldn’t classify someone as a contractor merely because employee administration costs more.


What a company gains by using independent contractors

A genuine independent-contractor relationship can work well when the business needs a result rather than another member of its workforce. A contractor may bring specialized knowledge the company doesn’t need every day. The engagement may have a defined scope, deadline, price, and deliverable. The contractor may determine how the work will be performed, supply the necessary tools, maintain insurance, serve multiple clients, hire assistants, and bear a real opportunity for profit or loss.


That can give the company flexibility without building a permanent position around temporary or intermittent work. The tradeoff is that a true contractor should remain meaningfully independent.


A company that wants to dictate working hours, require constant availability, control every step, prohibit outside work, provide detailed training, and move the person from task to task may really want an employee. Trying to exercise employee-level control while preserving contractor economics is often where the problem starts.

Contractor relationships also require careful attention to matters that employers sometimes take for granted.


The agreement may need to address:

  • ownership and assignment of intellectual property;

  • confidentiality and data security;

  • use of subcontractors;

  • insurance requirements;

  • responsibility for taxes and business expenses;

  • indemnification;

  • authority to communicate or contract on the company’s behalf;

  • performance standards and acceptance of deliverables;

  • return or destruction of company information;

  • transition assistance when the engagement ends.


The company should also expect that a legitimate contractor may have other clients, control their own methods, negotiate pricing, market their services, and resist being managed like an employee.


Two similar workers can still require different answers

Consider a technology specialist retained to complete a cybersecurity assessment. The specialist operates an established consulting company, advertises to the public, serves multiple clients, carries insurance, uses their own systems, sets the work plan, charges a project fee, can hire qualified assistance, and delivers a final report by an agreed deadline. Those facts generally support an independent-contractor relationship.

Now consider another person called a “technology consultant” who works only for one company, follows a set schedule, reports to the chief technology officer, attends mandatory staff meetings, uses company equipment, receives ongoing assignments, needs permission to take time off, and has no independent customers or business presence.


The title may be the same but, importantly, the relationship isn’t.


The same comparison can arise with salespeople, marketing professionals, drivers, accountants, designers, healthcare workers, construction personnel, administrative staff, and other roles. Classification follows the facts, not the profession alone.


What can happen when the classification is wrong

Misclassification exposure rarely stays in one box. A worker may file for unemployment compensation after the relationship ends. A workplace injury may raise workers’ compensation questions. A wage dispute may lead to claims for minimum wage or overtime. A tax audit may uncover unpaid withholding and employment taxes. A benefits claim may raise questions about eligibility under a plan. The dispute may begin with one worker and expand to everyone who performed a similar role.


Potential consequences can include:

  • unpaid wages and overtime;

  • liquidated damages;

  • unpaid payroll and unemployment taxes;

  • interest and penalties;

  • workers’ compensation exposure;

  • employee-benefit claims;

  • statutory penalties;

  • attorney’s fees;

  • government audits;

  • class or collective claims;

  • personal liability under some wage-payment laws;

  • disruption during financing, acquisition, or due diligence.


The IRS warns that a business without a reasonable basis for treating an employee as an independent contractor may be liable for employment taxes. Pennsylvania also advises businesses to maintain documentation supporting contractor classifications, including contracts, invoices, insurance certificates, business records, tax identification numbers, advertising, websites, and evidence that the worker operates an independent enterprise.

The absence of a complaint doesn’t necessarily mean the classification is sound. It may only mean nobody has challenged it yet.


A practical worker-classification review

The best audit starts with what happens, not what the agreement says.

For each contractor role, the company should review:

  • What services does the person actually perform?

  • Who decides when and where the work gets done?

  • Who determines the method, sequence, and details?

  • Can the worker accept or reject assignments?

  • Can the worker serve competitors or other clients?

  • Does the worker market services to the public?

  • Who provides equipment, software, supplies, and workspace?

  • Does the worker have unreimbursed expenses or meaningful investment?

  • Can the worker make a profit or suffer a loss through business decisions?

  • Is the person paid for time or for a result?

  • Can the person hire employees or subcontractors?

  • Is the relationship permanent, indefinite, or project-based?

  • Is the work central to the company’s ordinary business?

  • Does the worker receive benefits or benefits typically associated with employees?

  • Does the contractor agreement match the real relationship?


The review should include similar roles, not just individuals. Treating one person as an employee and another person doing substantially identical work as a contractor may require a clear, fact-based explanation.


Reclassification involves more than changing a tax form

When a review shows that a contractor should probably be an employee, the company should plan the transition carefully.


Changing future payroll treatment doesn’t automatically resolve earlier exposure. At the same time, the company shouldn’t leave a questionable arrangement in place simply because correcting it may raise uncomfortable questions. The transition may, and arguably should, require coordination among legal counsel, Human Resources, (HR), payroll, accounting, insurance professionals, benefits administrators, and management.


The company may need to address:

  • the effective date of employee status;

  • compensation and payroll withholding;

  • exempt/nonexempt classification;

  • benefits eligibility;

  • workers’ compensation and unemployment coverage;

  • offer letters and employment agreements;

  • intellectual-property and confidentiality obligations;

  • workplace policies;

  • treatment of prior invoices and expenses;

  • communications with the worker;

  • treatment of similarly situated individuals.


The IRS allows businesses and workers to request a federal employment-tax classification determination through Form SS-8. The IRS also maintains a Voluntary Classification Settlement Program, (VCSP), that may allow eligible businesses to reclassify workers prospectively for federal employment-tax purposes with partial relief. Neither process answers every state-law, wage-and-hour, workers’ compensation, or benefits question, so they shouldn’t be treated as universal solutions.


The contractor option also needs periodic maintenance

A classification audit isn’t only about moving people onto payroll. It may reveal that the contractor relationship is legitimate but poorly documented. The company may need a clearer scope of work, stronger confidentiality terms, intellectual-property assignments, insurance requirements, invoicing procedures, data-security provisions, or limits on authority.


It may also show that managers need training. A carefully drafted agreement won’t help much if the manager tells the contractor when to start each morning, requires permission for personal appointments, conducts employee-style performance reviews, prohibits outside clients, and controls every detail of the work. The operational side and the contract have to tell the same story.


Why Fractional General Counsel and Outside General Counsel should be involved

Worker classification sits at the intersection of employment law, tax, contracts, intellectual property, insurance, benefits, and business operations.


That makes it a natural Fractional General Counsel and Outside General Counsel issue.

Counsel can help the company identify which roles deserve review, apply the relevant tests, coordinate with accountants and payroll professionals, revise agreements, plan reclassification where appropriate, and train managers on maintaining the intended relationship.


The goal isn’t to classify everyone as an employee or everyone as a contractor.

The goal is to use each structure where it fits, understand the benefits and drawbacks, and make sure the company’s documents and daily practices support the decision.


Conclusion

Employee or Independent Contractor status shouldn’t depend on which form is easier to issue at the end of the year. Employees can give a company control, continuity, integration, and long-term capacity. Independent contractors can provide specialized expertise, project-based flexibility, and genuine outside business resources. Either structure can work well when the facts support it.


The problem arises when the company wants the benefits of one relationship while operating the other. Businesses should revisit worker classifications as jobs, reporting relationships, technology, workloads, and company needs change. A review can confirm that the current structure works, identify agreements or practices that need attention, or allow the company to correct a problem before an audit, claim, injury, termination, financing, or sale brings it to light.


Todd Nurick and Nurick Law Group, LLC help businesses evaluate employee and contractor relationships, prepare appropriate agreements, address classification risks, and coordinate broader employment and business-law needs through Fractional General Counsel and Outside General Counsel support.


Sources

Disclaimer: This article is for informational purposes only and isn’t legal advice. Reading it doesn’t create an attorney-client relationship. Todd Nurick and Nurick Law Group aren’t your attorneys unless and until there is a fully executed written fee agreement with Todd Nurick or Nurick Law Group.

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