Discussion With A Client About Classifying Employees as W2s Versus 1099s (Independent Contractors)

Posted by: charlesakrugel  /   Category: Business Management / Charles Krugel / Client Relations / Clients / Hiring / Human Capital / Human Resources / Labor and Employment Law / Practicing Law   /   2 Comments »

While meeting with a client regarding their company’s human capital issues, we discussed their businesses’ transition from classifying workers as 1099s to W2s. Due to confidentiality concerns, I won’t disclose much about the business, & of course, they gave me permission to post about this conversation.

A little more than a year ago, my client reclassified workers as W2s after paying them as 1099s. The basic idea of paying employees as 1099s (an oxymoron) is that the business avoids all payroll taxes & employment liability, including workers compensation & unemployment benefits. In theory, its’ supposed to lower overhead & make operations easier. A year after the change, my client believes otherwise.

According to them, because of the change, it’s never been easier to run their business. Employee morale has greatly improved–employees now feel more invested in the business’ success because they don’t have to worry about commissions;  the culture has shifted from “it’s all about me and what I am going to make in commission” to more of a team based culture where everyone is working together towards a common goal, sharing in the profits; their payroll costs are fixed; employees don’t have to worry about how much their paycheck will be; they don’t have the stress of worrying about whether or not they’ve improperly classified employees or will be audited; and ultimately profits are increasing.

They also have more time to devote to improving operations & investing in their employees. Such improvements include revising job descriptions, policies, procedures & upgrading equipment.

This is a possible lesson for other businesses who believe that by classifying workers as 1099s, they’re saving themselves money, time & aggravation.



  1. Michael Melder March 25, 2013 at 1:06 pm  / 

    Interesting article. I have also found that employers, focused of tangible costs, ignore the intangibles you list in your article. Increased productivity certainly increases with increased morale

  2. charlesakrugel March 25, 2013 at 7:52 pm  / 

    Thanks Michael.

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