<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=349935452247528&amp;ev=PageView&amp;noscript=1">
Find out where you can get a Taste of TAB... our global events blast is on!

The Alternative Board Blog

1099 Contractor Versus W2 Employee: You Need To Know the Difference

Apr. 22, 2022 | Posted by The Alternative Board TAB

The current labor market is a challenging one. There are no two ways about it. Wages are up, talent is scarce, and small business owners are being forced to get creative with their labor acquisition strategies. When faced with such a dearth of interested and engaged job seekers, many organizations are considering, perhaps for the first time, contracting out some or all of their positions. While contractors are often seasoned professionals who wield formidable skills, as an employer it is vital to understand the difference between a 1099 contractor versus a W2 employee. Make no mistake. The decision on which type of worker to hire is not an arbitrary one and misclassification can cost businesses dearly.

Even prior to the pandemic, many businesses were increasingly supplementing or replacing their standard employment model with contract workers. There are undeniable benefits to this approach. Businesses get seasoned workers and usually save money in the process. They simply pay for the work they need performed when they need it. No pricey health insurance, no paid time off, no payroll taxes.

So what business owner in their right mind wouldn’t just hire contractors to do the work?

Turns out, there are some pretty strict federal and state rules governing what defines a 1099 contractor. It all boils down to how much control and direction a business has over a person’s performance and work product.

If It Quacks Like a Duck

There is an old familiar adage when it comes to classifying 1099 contractors versus W2 employees. If it looks like a duck and quacks like a duck, it’s a duck. Say you hire a contractor to cover a certain workload, but you require that person to clock in at a certain time, you provide them a company computer, you dictate when they break for lunch, you insist they wear a company uniform, you make them attend mandatory meetings, and you require them to check in with a manager. You better watch out because you just misclassified an employee as an independent contractor.

True contractors have immense control over how they perform their jobs. Consider a painter. One would never tell a painting contractor what type of overalls to wear, what size paint brush to use, when they can break for a meal, or how much tape to use. That painting contractor has control over all these aspects of the way they run their business and perform their services.

It gets murkier when contractors are working inside your business and even perhaps alongside your W2 employees. Which brings us to another important point. If your 1099 contractor is essentially performing the same function under the same guidelines as a W2 employee of yours, chances are you have misclassified them.

Why Does It Matter?

Misclassification harms workers who are entitled to the fruits of being a W2 employee and also gives employers undue financial benefit at the expense of the misclassified labor. Contractors generally must pay the entirety of related income tax, Medicare, and Social Security taxes. Were that contractor instead an employee, the employer would be responsible for a good chunk of that tax burden, not to mention overtime wages and other benefits.

Liability for Misclassification

Misclassification can cost businesses serious money. Both private and class action lawsuits are on the rise:

  • Just this month a Florida federal court ruled that an eldercare home healthcare worker was misclassified as a contractor. The worker is now entitled to three years of unpaid overtime wages and liquidated damages equivalent to twice the unpaid wages.
  • In February the US Department of Labor announced it recovered $139 thousand in overtime back wages and liquidated damages from a cement-cutting business for 21 employees misclassified as independent contractors.
  • In October 2021, an energy land service company agreed to pay $43 million in back wages to more than 700 misclassified employees in Pennsylvania, which ultimately drove the business into bankruptcy.

It is estimate that up to 30 percent of employers misclassify employees as independent contractors. And there are new big-buck lawsuits being settled every day.

As the contractor misclassification issue continues to surface and workers become increasingly aware of their labor rights, business owners would be wise to familiarize themselves with state and federal rules defining employment - or risk facing some pretty substantial penalties.

Read our 19 Reasons You Need a Business Owner Advisory Board


Written by The Alternative Board TAB

Related posts

How to Build an Ethical Workplace Culture
Mar. 6, 2024 | Posted by Lee Polevoi
Most of us understand what it means to act in an ethical manner. CEOs and business owners frequently advocate a set of ethics by which to run their organizations, helping the workforce maintain a...
Goal-Setting Tips for Your Remote Work Team
Jan. 31, 2024 | Posted by Lee Polevoi
Is there any difference between setting goals for your on-site team and your remote workforce? Certainly, there are striking familiarities. For example, whether employees work in-house or are...
How to Cultivate a "Goal-Focused" CEO Mindset
Jan. 17, 2024 | Posted by Lee Polevoi
The coming of a new year is the best time to re-think the past year’s professional and personal goals and start cultivating new goals for the weeks and months ahead. Of necessity, this means...
What is Talent Optimization?
Aug. 16, 2023 | Posted by Lee Polevoi
Think how much easier hiring new employees would be if the process was an exact science. Well, in some respects, it already is. According to The Predictive Index, “Talent optimization” is “a...
7 Things Even Your Best Employees Hate
May. 24, 2023 | Posted by The Alternative Board
The employment market has been brutal for most companies and industry at large. While job seekers are certainly also experiencing employment volatility, it still appears that in many ways the...
When Is It Time To Fire an Employee?
May. 10, 2023 | Posted by The Alternative Board
Terminating an employee is never fun. Even for the most polished and seasoned business owner, the process of letting someone go is almost universally stressful, unpleasant and emotionally...
Create a Culture of Health and Wellness in Your Business
Mar. 22, 2023 | Posted by The Alternative Board
Today’s employees have elevated expectations of their workplace environments. Long gone are the days of mindlessly clocking in and out from an unsatisfying, sterile and disengaging job. Employees...
Wonderful Ways To Boost Employee Morale
Mar. 8, 2023 | Posted by The Alternative Board
Employee morale has a massive impact on the overall success of your business. When employees are happy, engaged and thriving they are more productive, less likely to call in sick and much less apt to...
Remote Work: Where We Were, Where We Are and Where We're Headed
Feb. 23, 2023 | Posted by The Alternative Board
Working remotely has been a part of our lives since the beginning of human existence. It started with the hunters and gatherers. Even as late as the 1800s, most business owners ran their services...
Everything You Need to Know About Quiet Quitting
Sep. 15, 2022 | Posted by The Alternative Board
Quiet quitting. It’s the latest business buzz, and a sizzling hot topic on social media and throughout employment and HR sectors. Depending on who you ask, quiet quitting either refers to workers...