By Mark Adams
As the gig economy continues to flourish, many small businesses (and others) lean on independent contractors to stay agile and cost‑effective. However, misclassification isn’t just an HR oversight—it presents real financial, legal, and reputational hazards. Misclassified workers can trigger back‑tax liability (including unpaid payroll tax, Social Security, Medicare, and unemployment insurance), potential wage‑and‑hour violations, and penalties with accumulated interest—all of which can override any short‑term savings. Beyond financial repercussions, losing employee protections like minimum wage, overtime pay, unemployment insurance, and workers’ compensation places your organization in serious compliance hot water—and damages employee trust and employer brand.
2025 has already seen pivotal court rulings that should ring alarm bells in every HR department. In January, a federal judge in New Mexico upheld the Biden‑era 2024 DOL rule tightening independent‑contractor classification. The decision in Colt & Joe Trucking v. DOL confirmed the rule’s validity and emphasized that workers “economically dependent” on a business must be treated as employees—entitling them to full FLSA protections. Another notable case, The Party Staff v. Qwick et al., involves a hospitality staffing firm suing gig platforms for gaining unfair market advantage through misclassification, alleging harmful effects on competition, revenues, and state tax collection in California. This is case is still working its way through the courts.
It’s not only courts that are stepping up oversight. The U.S. Department of Labor’s Wage & Hour Division recently issued updated guidance—barring enforcement of the 2024 rule during its review, but reinforcing traditional economic‑realities tests used under FLSA. Independently, states like New York are considering new legislation empowering agencies to impose stop‑work orders for uncorrected misclassification. Combined, these changes elevate the misclassification issue from compliance yellow flag to full‑blown risk with potentially immediate and severe consequences.
In light of these developments, HR professionals and business owners should treat worker classification as a strategic imperative—not a checkbox. Conduct regular audits of exempt and non‑exempt designations; apply both federal “economic‑realities” and relevant state standards (such as Massachusetts and Connecticut’s stringent 3-prong or “ABC” Test); and review contracts, supervision, and payment structures for conformity. Maintain transparent, consistent documentation showing any independent contractor truly operates an autonomous business. And in the event of enforcement action—or a looming class‑action threat—consult employment counsel promptly. Proper classification preserves payroll savings and protects your organization from crippling back‑tax bills, multi‑million‑dollar lawsuits, and reputational harm.
EANE will be focusing on this topic in its upcoming webinar “Employee vs. Independent Contractor – There is More to It Than a 1099” on July 22nd. Members can register for this webinar by clicking here.