United States: Employers Beware: Misclassification Cases Are Costly And Common

Many employers erroneously classify workers who should be employees as independent contractors, due to the significant tax savings. However, misclassification cases present major risks. The independent contractor status for a worker is not favored by the IRS, the Department of Labor (DOL), the states, and many agencies within the states including those enforcing workers' compensation benefits and unemployment. As such, treating a worker who should be an employee as an independent contractor can result in costly litigation and even personal liability.

The biggest problem in classifying workers is that there is no uniform definition of "employee" or "independent contractor" under all the Federal and State labor and tax laws. The Fair Labor Standards Act, passed in 1935, has the broadest definition of "employee" and that has served as the model for most State wage hour laws. Additionally, there have been and continue to be many cases concerning this issue being litigated under Federal and State wage/hour statutes.

The Common Law Definition of Employee

  1. The extent of control which is exerted by the employer over the details of the individual's work.
  2. Whether the individual is engaged in a distinct occupation or business, so that the individual has an opportunity for profit or loss.
  3. Whether the work is done under the direction of the employer, or by the individual without supervision.
  4. The skill, experience, and specialized training required by the individual's particular occupation.
  5. Whether the individual supplies the tools, equipment, and place for performing the work.
  6. The length of time for which the individual is engaged.
  7. The method of payment, whether by the hour or by the project.
  8. Whether the work is part of the regular business of the employer.
  9. Whether the parties believe they are creating the employer-employee relationship.
  10. Whether the individual is, or is not, an independent business.

These elements are not given equal weight by reviewing courts and agencies. In fact, Number 9 is rarely given much weight. This case-by-case factual analysis gives the courts and agencies reviewing these cases wide latitude to "reach" the result they desire, as long as they support it with at least some of the major elements.

The IRS Common Law Standard

The IRS now groups the common law standards into three major categories to evaluate whether an individual is an employee or an independent contractor.

  1. Behavioral: Does the Company control or have the right to control what the worker does and how the worker does the job? To analyze this the IRS considers four factors:

    1. The type of instruction given;
    2. The degree of instruction;
    3. Evaluation systems; and
    4. Training.
  2. Financial: Are the business aspects of the job controlled by the employer? The IRS looks at 5 factors to analyze this category:

    1. Does the worker have a significant investment?
    2. Is the worker reimbursed for expenses?
    3. Does the worker have an opportunity for profit or loss?
    4. Are the worker's services available to other employers in the marketplace?
    5. What is the method of payment?
  3. Relationship: The IRS breaks this category into four factors:

    1. Are there written contracts?
    2. Does the individual receive any benefits like vacation pay, insurance, retirement?
    3. Is the relationship regular and on-going, or for a limited time or specific project?
    4. Are the services provided by the individual a key element of the employer's business, or are they ancillary to the employer's business?

Obviously, each of these tests are similar in that they review the same factors. Over the years, case-by-case adjudication has been very fact sensitive, so there has never been a clear and universal test for determining whether a worker is an employee or an independent contractor.

Razak v Uber Technologies Inc., Case No. 16-573 (E.D. Pa. April 11, 2018), which was just decided by a Federal District Court in Pennsylvania, presents an interesting ruling on this issue. In Razak, the Court ruled that drivers for Uber were independent contractors, under the FLSA and Pennsylvania wage hour laws. At first blush, this decision by dismissing the Plaintiffs' claims that they were employees may appear to be strong support for the status of independent contractors.

However, this decision emphasizes the unique nature of the relationship between Uber and its drivers. The Court pointed out that the drivers have absolute freedom to determine their working hours, work locations, and to decide how much they work, which determines the amount they can earn. Uber does not restrict its drivers from working for other employers, including its own competitors, even while the driver may be online on the Uber App. Uber drivers can go online as much or as little as they choose, and are free to accept or reject any requested rider. The Court also emphasized that all Uber drivers must either own or lease a suitable vehicle, and that none of the significant expenses of a vehicle were ever reimbursed by Uber. The Court agreed that Uber drivers had total economic independence, effectively operating as their own business organization.

This case highlights the difficulties an employer faces in trying to assert that a worker is an independent contractor. It is a rare relationship indeed that allows a worker to have complete discretion over how much, where and when the worker actually works. The investment by the worker in a car and iPhone in order to access the Uber App and render the service are also extreme. Finally, the entire Uber business model is predicated on its drivers being able to work for other employers, even competitors, at the same time they are performing services for Uber.

Since September of 2011, the DOL and the IRS have had a Memorandum of Understanding (MOU) to share information and pursue a joint initiative to prevent misclassification of employees as independent contractors. Recently, the IRS has received criticism from the Treasury Inspector General for Tax Administration. The report accused the IRS of failing to effectually implement the worker misclassification MOU. This could result in more enforcement efforts by the IRS. Even if the IRS terminates the program, many states are getting into this area. In a truly bipartisan effort, many states have recognized that the payroll taxes lost from employers misclassifying workers could be a significant, untapped source of revenue. As of a year ago, 32 states and the U.S. Department of Labor had announced a partnership to coordinate efforts to prevent misclassifications of employees as independent contractors. This partnership provides that all of these states, will share information and coordinate investigations with the Federal government to enhance enforcement of Federal and State Wage and Hour Laws. It also provides a framework under which Federal and State agencies, including the IRS, will work together to share information and resources to increase enforcement of misclassified worker laws. Therefore, even if Federal enforcement of misclassification cases may be less aggressive under the current Presidential Administration, it is clear that many states, will be aggressively pursuing the taxes available from employers which misclassify employees as independent contractors.

Finally, in addition to government investigations and actions, an employer with a large number of independent contractors could face a class action lawsuit, brought by private attorneys in either State or Federal court in any jurisdiction within which an employer has workers or operates.


Employers engaging any workers that they classify as independent contractors should carefully review those individuals to determine whether they should really be employees. Such a self-audit done in advance of a claim or an investigation could result in correcting any misclassifications before a claim is filed. The liability for unpaid wages and benefits, unpaid payroll taxes and the penalties set forth in the various Federal and State tax, wage-hour, and benefits laws can be significant, but could be easily avoided by working with competent counsel to be sure that your workers are properly classified.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Lincoln Derr PLLC
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Lincoln Derr PLLC
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions