Employees vs Independent Contractors USA
Updated as of 2026
Introduction
Independent contractor misclassification continues to be an area of focus for both federal enforcement agencies, including the U.S. Department of Labor (“DOL”) and the Internal Revenue Service (“IRS”), and state enforcement agencies. Independent contractor misclassification is a nationwide issue, spanning all industries and all regions. Commonly cited industries include: transportation, ride sharing, janitorial, food services, IT services, courier services, day care, commercial cleaning, and startups. Misclassification may result in workers being denied employee benefits and protections and may expose employers to significant liability under federal and state laws. Employer risks resulting from independent contractor misclassification include:
i. Liability for unpaid employment taxes
- past federal payroll taxes (3 years back, or more)
- state payroll taxes
- up to 100% penalty—if willful failure
- income tax not withheld
- trust fund recovery penalty for responsible persons
ii. Failure to pay minimum wage and overtime
- recovery by administrative authorities or civil litigants of unpaid minimum wage/ overtime
- liquidated damages (100% penalty)
- application of damages to similarly situated workers, not just the individual worker
- DOL supervision over payment of wages
- attorneys’ fees and costs
iii. Unfair labor practices liability under the National Labor Relations Act
iv. Immigration liability to the extent employers hire non-U.S. citizen workers as independent contractors.
v. Exposure to claims for coverage under employee benefit plans (Note: No statute of limitations)
The distinction between employees and independent contractors is defined somewhat
differently depending on the statutory context. Key legislation relating to independent
contractor misclassification includes:
- Immigration liability to the extent employers hire non-U.S. citizen workers as independent contractors.
- Exposure to claims for coverage under employee benefit plans (Note: No statute of limitations)
The distinction between employees and independent contractors is defined somewhat
differently depending on the statutory context. Key legislation relating to independent
contractor misclassification includes:
- IRS: U.S. Tax Code (federal income tax withholding)
- U.S. Department of Labor:
- FLSA (Fair Labor Standards Act – minimum wage and overtime);
- FMLA (Family and Medical Leave Act);
- ERISA (Employee Retirement Income Security Act)
- State Unemployment Laws/Agencies
- State Workers’ Compensation Laws/Agencies
- State Income Tax Withholding
- Federal Anti-Discrimination Laws (Title VII, ADA, etc.)
- State and Local Anti-Discrimination Laws
- NLRA (National Labor Relations Act)
- IRCA (Immigration Reform and Control Act)
