You needed help, so you brought someone on. You called them an independent contractor. They signed an agreement that said so, you paid them on a 1099, and you moved on to running your business.
Now a notice has landed on your desk saying that person was an employee the whole time, and you’re being held responsible for everything that comes with that. There’s a number attached. There’s a deadline. And there’s a process ahead that’s going to involve lawyers on both sides.
You thought you had this right. Maybe you chose the contractor route specifically to avoid a mess like this one.
Here’s the part nobody explains up front: whether someone is a contractor or an employee isn’t a decision you get to make. It’s a question the law answers, based on how the relationship actually worked. And the answer can be different from the one on the paperwork.
Independent Contractor vs. Employee
There is no single definition of “independent contractor” that every agency and court uses. What they share is a starting point: the working relationship decides their classification, not the label on the employment contract.
It doesn’t matter that the worker signed an agreement, asked to be paid on a 1099, or set up an LLC. Those are facts about the paperwork. The law looks at the work.
The tests differ in their details, but they all circle the same handful of questions.
- Who controls the work? Do you decide when, where, and how the job gets done, or do they? Set hours, required methods, and direct supervision point toward a classification of employee. A person who takes the assignment and delivers the result their own way looks more like a contractor.
- Whose business is it? Is the work they do the core of what your company does? A plumber you hire to fix the office sink is a contractor. A plumber you send out on your plumbing company’s jobs is much harder to call one.
- Can they work for other people? A contractor has other clients, or could. An arrangement that fills their week and leaves no room for anyone else points the other way.
- Whose tools, whose risk? Do they bring their own equipment, cover their own expenses, and stand to lose money if the job goes badly? Or do you supply everything and pay them regardless of the outcome?
- How long, and how open-ended? A defined project with an end date reads as contractor work. An ongoing relationship with no end in sight reads as employment.
- How are they paid? By the project or by invoice, or by the hour on a regular schedule?
No one of these decides the question on its own. But when enough of them lean in the same direction, the answer becomes clear.
Take a common situation. A marketing firm brings on a designer as a contractor. The designer works from home, which feels like independence. But the firm assigns the projects, sets the deadlines, requires daily check-ins, and pays a flat weekly amount. The designer has had no other clients in two years because there’s no time for any. They call it a contractor, but under nearly every test, it’s an employee.
Which test applies depends on who’s asking. The IRS focuses on control. The U.S. Department of Labor looks at whether the worker is economically dependent on your business. And the states layer their own rules on top, some of them stricter than the federal ones.
Maryland applies a three-part standard in construction and landscaping that’s harder to satisfy than the federal tests. DC’s wage and hour laws are among the most protective of workers anywhere in the country, which raises what a misclassified worker can recover.
The same relationship can come out one way under federal tax rules and another under a state labor statute. That’s why a business can be in good standing with one agency and in trouble with another.
Why Does Misclassification Matter?
Every one of those questions matters because of what follows from the answer. Employee status comes with obligations attached: tax withholding, overtime, benefits, unemployment and workers’ compensation coverage, and a set of legal protections a contractor doesn’t have.
If the relationship was determined to be an employer-employee relationship, those obligations existed the whole time, whether or not anyone was tracking them.
The letter you received is the bill. The line items on that bill trace directly back to the questions above. If you set the hours and paid by the week, that’s the control that makes an overtime claim work. If the person did your core work for three years with no end date, that’s the ongoing relationship behind three years of unpaid payroll taxes.
Depending on the agency, they’re asking for what the business didn’t pay. The IRS or a state revenue office wants the employment taxes that should have been withheld and matched. A state labor department wants unpaid unemployment insurance contributions. A workers’ compensation board wants to know why there was no coverage.
Each comes with penalties and interest, and the look-back period can run several years.
An assessment is what an agency concluded from the records it had, which may not be all of them.
What To Do Next
The first few days after the Notice of Investigation arrives matter more than most business owners expect. Nothing has been decided yet, and the goal right now is to keep it that way.
- Find the deadline and treat it as real. An agency can make an adverse determination if the business fails to respond or cooperate. Missing the date can cost more than the underlying claim.
- Gather the records. The agreement, invoices, payment history, emails about scheduling and assignments, anything showing the person worked for other clients. The questions from earlier in this article get answered from these documents, and so does your defense.
- Don’t change anything yet. Reclassifying other workers or rewriting agreements the week after a letter arrives can look like an admission. That may be the right move eventually, but it should be a decision made with counsel, not a reaction.
- Get someone who handles these inquiries. Not the accountant, and not the lawyer who drafted the original contract. If the letter came from an agency, you’re headed into an administrative hearing, and you need someone who represents businesses in regulatory compliance and enforcement matters.
The Notice Isn’t the Last Word
At Griffith Law Group, we’ve represented business owners facing misclassification claims, from the first notice through resolution.
Sometimes the classification was right and the job is proving it. Sometimes it wasn’t, and the job is mitigating the financial exposure down to something the business can withstand. Either way, the first conversation starts with the same question: what does success look like for you?
“Most owners who call me about this did what they thought was right. My job isn’t to judge that. It’s to figure out what the facts actually support, and get the best resolution for my client.”
– Marlon Griffith
If you’ve received a notice about a worker’s classification, the clock is already running. Schedule a consultation and let’s talk about where you stand.