Employee or Independent Contractor?
Understanding Misclassification
Companies generally get the workers they need in two ways: they hire employees or they contract with independent service providers. When those independent providers are individuals, rather than other companies, the line between an employee and a contractor can get fuzzy.
Most people understand the difference between employees and contractors as primarily affecting taxes. This focus is reinforced by business terminology, which often describes workers as “W2 employees” and “1099 workers,” defining workers’ status by the tax forms used to report their pay.
But whether you are an employee or an independent contractor also determines your eligibility for benefits, unemployment, and other protections—including the protections available under the federal Fair Labor Standards Act and North Carolina’s Wage and Hour Act. (Federal and state discrimination laws are also limited to employees; those issues are not discussed here.)
How your pay is reported is, in fact, irrelevant to the question of whether you are an employee or an independent contractor. Furthermore, two sets of agencies are concerned with employment status: the Internal Revenue Service and the US Department of Labor, and the North Carolina Department of Revenue and Department of Labor. And those agencies use different tests to determine whether you are properly classified. In fact, in some cases, you could be an employee for one purpose and an independent contractor for another.
Independent Contractor or Employee? Federal Law
Federal agencies rely on two subtly different tests to decide whether a given worker is an employee or a contractor.
| IRS (taxes) | DOL (benefits, wage protections) |
| Common law standard | Governed by DOL regulations “totality of the circumstances”—no one factor weighs more than any others |
| Focus on degree of control in the relationship | Focus on whether worker is economically dependent on the employer |
Key factors
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Key factors
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Independent Contractor or Employee? State Law
The picture is even more complicated under state law, because states are concerned with the employer/employee relationship in different contexts. Besides taxation and employment regulation, states, including North Carolina, also must examine the relationship in the context of workers compensation and unemployment insurance.
In North Carolina, the determination whether a worker is an employee or an independent contractor has largely been made by courts, with one exception. The North Carolina Department of Labor has expressly adopted the federal Department of Labor test for determinations under North Carolina’s Wage and Hour Act.
Unsure? Get Experienced Help!
As this summary makes clear, figuring out whether you are misclassified is not easy. The answer depends on the specific context of your employment and on the law you’re concerned about. And the consequences of misclassification are likely determined by those factors as well.
If you are concerned you may have been misclassified, you need experienced legal help—to figure out if you are misclassified and to protect your rights. The laws that protect you have time limits for filing claims.
Protect your rights — Contact the experienced lawyers at Miller Law Group today!
