Properly classifying workers as independent contractors or employees is a legal minefield that businesses can’t afford to misstep. Misclassification can lead to hefty fines, lawsuits, and reputational damage. But how do you know if you’ve got it right? Enter the Independent Contractor Red Flag Checklist—your go-to tool for assessing whether a worker is genuinely an independent contractor or if they lean closer to being an employee under the law.
Why Classification Matters
The distinction between independent contractors and employees isn’t just semantics—it determines things like tax obligations, benefits eligibility, and legal protections. Misclassification is a hot-button issue with both state and federal regulators, so getting it wrong could cost your company dearly.
The core of the issue often boils down to two things:
- Control: How much control does the company have over how the worker does their job?
- Economic Dependence: Does the worker operate independently, or are they economically dependent on the company?
By carefully evaluating these factors, businesses can avoid legal trouble and ensure compliance.
The Red Flags to Watch Out For
Here’s a breakdown of key factors to consider when determining whether someone is truly an independent contractor—and the “red flags” that might indicate they’re more like an employee. While no single factor is definitive, multiple red flags should prompt a deeper evaluation.
1. Does the Company Give Instructions?
🚩 Red Flag: If the company dictates how the work should be done (beyond basic job specifications), it’s a sign of control—and a step closer to an employer-employee relationship.
2. Company-Provided Training
🚩 Red Flag: Training that requires workers to follow company methods indicates the worker is being integrated into the company, which is typical for employees.
3. Can the Worker Sub-Contract?
🚩 Red Flag: If the worker cannot delegate tasks to others, they may lack the independence typical of contractors.
4. Does the Worker Impact Company Success?
🚩 Red Flag: If the company’s success depends heavily on the worker’s services, they may be essential enough to be considered an employee.
5. Who Controls Work Hours?
🚩 Red Flag: If the company sets specific work hours or requires work to be done during business hours, it signals a level of control inconsistent with contractor status.
6. Is the Relationship Regular and Ongoing?
🚩 Red Flag: Frequent or continuous work for the company can blur the line between independent contractor and employee.
7. Who Decides Job Location?
🚩 Red Flag: If the company dictates where the work must be done—especially if it’s on company premises—it suggests control.
8. Does the Worker Have Time for Other Clients?
🚩 Red Flag: A worker who can’t take on other clients due to time constraints might be economically dependent on the company.
9. Payment Method
🚩 Red Flag: Paying a worker hourly, rather than by the project, suggests a relationship more aligned with employment.
Evaluating the Economic Realities
Beyond control, businesses need to assess the economic realities of the relationship. Here are more questions to consider:
- Who owns the tools and equipment? If the company provides everything needed to perform the job, it could indicate an employee relationship.
- Does the worker face profit or loss? Independent contractors typically invest in their own business and bear the risk of loss.
- Are the worker’s services available to the public? True contractors often advertise their services, have business licenses, and take on work for multiple clients.
Strengths vs. Weaknesses: What the Checklist Reveals
Once you’ve reviewed the checklist, break it into two categories:
- Strengths: These are the factors that support an independent contractor classification (e.g., the worker sets their own hours, provides their own tools, and works for multiple companies).
- Weaknesses: These are the red flags that suggest the worker might actually be an employee (e.g., the company controls how the work is performed or the worker doesn’t advertise their services).
Weighing these strengths and weaknesses allows businesses to make informed decisions about worker classification and identify areas for potential adjustments.
What Happens If You Get It Wrong?
Misclassifying an employee as an independent contractor can result in:
- Back taxes and penalties from the IRS.
- Lawsuits from workers claiming unpaid wages or benefits.
- Regulatory investigations that could lead to fines and reputational damage.
A Proactive Approach to Classification
Worker classification isn’t just a legal compliance issue—it’s a strategic decision that can affect your business’s bottom line. Using a red flag checklist helps you navigate this gray area with clarity and confidence.
If you’re unsure about how to classify a worker or want to avoid costly missteps, consulting a legal professional is your best move. Our team at Chibasco specializes in helping businesses assess worker relationships and develop robust independent contractor agreements.