I’m Cited in HR.com Article

As the line between independent contractors and employees continues to blur, businesses face growing legal and operational challenges. Misclassification can result in audits, penalties, and costly back-pay claims.

Part 1 of our series dives into independent contractors vs. employee classification, covering tax, wage, and HR pitfalls businesses must address to avoid penalties.

In Part 2 of our series, legal and HR experts explore state-specific rules, global shifts toward dependent-contractor benefits, and the changing nature of employment. This article highlights the strategic and compliance considerations employers must navigate in today’s complex workforce landscape.

1. Addressing Multi-State Complexity and the Persistence of State-Specific Definitions
2. The Global Shift Towards Dependent Contractor Status and Portable Benefits
3. State-Specific Labor Gaps and the Strict Application of the ABC Test
4. The Arduous Enforcement of IC Contracts and Shifting Union Focus
5. The “Melting” Definition of Employment and the Demand for Bespoke Work

Addressing Multi-State Complexity and the Persistence of State-Specific Definitions

A common pitfall is the failure of a company to realize that multiple laws may apply and may have different rules for classification. While the IRS has a federal definition of IC, many states have a much narrower definition. Some state laws presume the individual is an employee and require the employer to satisfy a very rigid and limited test. This can result in a person correctly classified for IRS purposes being misclassified under state law.

Other pitfalls include assuming that a person working sporadically or for a very limited number of hours can be defined as an IC, or abiding by a person’s request to be an IC when they should legally be an employee. The fact remains that if the person is misclassified, the company will be liable and usually is the primary target of the governmental agency.

Businesses should pay particular care when classifying gig workers who are working remotely. If the gig worker is in a different state, it is possible that the law of the state where the gig worker resides will apply. Misclassifying someone as an IC can have negative financial and legal consequences for the gig worker as well.

For example, ICs are generally considered self-employed and required to pay self-employment taxes such as Social Security and Medicare; if they fail to pay these, the IRS could seek payment of unpaid taxes along with interest and penalties. Even if a uniform federal standard were implemented, state laws will still be relevant because federal employment laws generally set a minimum standard and allow states to pass laws that provide even greater protections to employees.

Matthew M. Collins, Partner and Co-Chair of Labor and Employment, Brach Eichler

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The Global Shift Towards Dependent Contractor Status and Portable Benefits

In most states, gig workers are treated as independent contractors, meaning they are self-employed and have virtually no labor protections. They are ineligible for overtime and minimum wage protections, are unable to organize into unions, and are not eligible for workers’ compensation. Apps like DoorDash or Uber are shielded from liability for driver accidents because the drivers are not employees.

Initially, advocacy groups fought to have gig workers reclassified as employees. However, there has been a shift toward providing benefits to workers while maintaining their IC status. Massachusetts approved a ballot measure maintaining IC status but affording workers the right to unionize and collectively negotiate.

California also passed a measure classifying gig workers as ICs but entitling them to minimum wage protections, health care subsidies, and disability insurance. Utah, Tennessee, and Alabama have passed laws allowing businesses to voluntarily contribute to portable benefits packages for ICs.

Globally, the EU established “platform workers’ rights,” including transparent and predictable working conditions and free mandatory training. Canada and Italy have classified some gig workers as “dependent contractors” or “para-subordinate workers”. These workers rely primarily on a single client and are thus entitled to labor benefits such as severance pay, minimum wage, social security contributions, or sick leave.

Marcus Graham, Senior Counsel, Clark Hill

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State-Specific Labor Gaps and the Strict Application of the ABC Test

The labor protections gig workers are currently entitled to vary from state to state. For example, under New York’s Freelance Isn’t Free Act, ICs are entitled to a written contract, fair payment, and protection from discrimination. However, in both New York and New Jersey, gig workers are not entitled to minimum wage, overtime, workers’ compensation, unemployment, or health insurance.

When hiring ICs, companies must ensure they have a written agreement requiring the IC to be responsible for any taxes owed and to carry their own workers’ compensation insurance. Companies must look to their state’s law regarding classification factors. New York generally uses multi-factor “common law” and “economic realities” tests.

New Jersey, on the other hand, uses the strict “ABC” test, which requires satisfying all three conditions: (A) freedom from control, (B) service performed outside the usual course of business, and (C) the worker is customarily engaged in an independently established trade.

Failure to conduct this analysis will most likely lead to misclassification and severe penalties. Misclassification denies gig workers critical employee protections and benefits, including minimum wage, paid sick leave, and job-protected leaves of absence. Under the current federal administration, worker classification is predicted to remain a state-by-state issue.

Alix Rubin, Employment Law Attorney/Owner, Rubin Employment Law

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The Arduous Enforcement of IC Contracts and Shifting Union Focus

Generally, labor protection for gig workers in the U.S. is “not much”. The prevailing perspective is that ICs are contractually free to set the terms of their work, and such contracts are enforceable via private lawsuits or limited regulatory agencies. In my experience, these agencies and courts have limited ability to expeditiously investigate and resolve disputes. Even if a gig worker obtains a judgment against a customer, enforcing that judgment can be arduous. Maybe a third of the time, a gig worker will get at least 100% of what’s owed, while around two-thirds of the time, they’ll have to settle for less.

Unions and related groups have had some, but not tremendous, impact on the wage and safety issues surrounding ICs. There is still a significant amount of misclassification, where businesses try to use legitimate W2 employees as illegitimate 1099 ICs, resulting in workers losing out on minimum wage guarantees, overtime, and benefits. However, labor advocacy has had a greater impact on wages and safety.

Labor advocacy for increasing the minimum wage among gig workers seems to be helping them earn more on an hourly basis, and drawing attention to safety concerns is leading to greater attention being paid to worker wellness and safety.

Charles Krugel, Attorney, Labor & Employment Law & Human Resources Counseling, Charles A. Krugel

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The “Melting” Definition of Employment and the Demand for Bespoke Work

I am seeing traditional definitions of employment melting. Using the “ice cube tray metaphor,” traditional employment represents “well-formed and frozen solid” ice cubes where parameters are clear. Now, the environment is “slushy,” with some solid cubes still formed, but others are “melty,” overlapping, and sloshing around. Employers often look for “efficiency” in the process. This mechanical model of work is being challenged as humans recognize that “humans are effective and machines are efficient”. Many employees are choosing to exit where too much efficiency is asked of them.

Hiring “slushy ice cubes” requires an organization to design, think about, and experiment with the work differently. Organizations must determine how much “bespoke” work (work designed with the desires/preferences of an employee) they can tolerate. I believe “someone has unplugged the ice maker”. The framework offered is that organizations must first understand the “black and white” of employment law and federal requirements—the “sandbox of ‘musts'”—and then get creative.

The requirement for boards of publicly traded corporations to have a financial-only objective stresses the ability of a business to create a workplace that can thrive in our current situation. The “B” Corp alternative allows for the consideration of other bottom lines.

Joanne Lakomski, Human Resources Consultant, Human Resourceress

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Takeaway: From local statutes to global initiatives, businesses face a patchwork of rules—and the very concept of “employment” is in flux. Leaders must align compliance with strategy while designing workplaces that attract and respect today’s increasingly “slushy” workforce.

Author Bio

Brett Farmiloe is the CEO & Founder of Featured.