Wait, am I an Independent Contractor?
Isabel Smrstik
Associate Editor
Loyola University Chicago School of Law, JD 2027
Work looks very different for everybody, with remote work, gig economy jobs, such as rideshare drivers or freelance writers, and independent contractors. It can be hard to answer the simple question of “What do you do for work?” Misclassification of your employment status, such as being classified as an independent contractor when you are really an employee, can be detrimental for people, as it can prevent access to benefits and protections. These protections include the right to overtime pay, anti-discrimination policies, and worker’s compensation. In 2020 it was found that 10-30% of employers misclassified their workers. The most misclassified jobs range from construction workers, housekeeping cleaners, and security guards. Typically workers with less formal education are at risk for misclassification. A key solution to the issue of misclassification of workers is education on both the part of the employer and the worker.
Employee vs. independent contractor
Between 2017 and 2023, independent contractor working arrangements increased by 12%, meaning almost 12 million Americans classified their primary work as independent contracting. Employers may prefer to utilize independent contractors because these arrangements allow employers to avoid employee expenses, like worker’s compensation insurance, 401k matches, and other benefits.
A key difference between an employee and an independent contractor is that employees receive the protection of the Fair Labor Standards Act (FLSA) where independent contractors do not. Rather, independent contractors are deemed to be in business for themselves and thus are not entitled to the protections of the FLSA. There are multiple ways to determine whether a worker is an employee or an independent contractor. The FLSA utilizes the “Economic Reality Test”. This test considers six factors when determining the classification of a worker including: opportunity for profit or loss depending on managerial skill, investments by the worker and the employer, permanence of the work relationship, nature and degree of control, whether the work is performed is integral to the employer’s business, and skill and initiative. No single factor in this analysis is determinative. What a worker is called, where the work is performed, and both the time and mode of pay are irrelevant to determining whether a worker is classified as an employee or an independent contractor Once a worker is deemed to be working as an employee under the FLSA, they are not allowed to waive employee status to be classified as an independent contractor.
The Internal Revenue Service “IRS” has their own system for determining independent contractor or employee status. They focus on three main factors: behavioral control, financial control, and the relationship of the parties. Like the FLSA test, no single factor decides status, and each individual case is fact dependent. If a worker is classified as an independent contractor, the worker is responsible for paying their own income tax and self-employment tax.
The importance of classification
Many workers don’t want to upset their employer by asking questions about their employment classification. Additionally, many workers may not even understand the differences between an employee and an independent contractor. There are detrimental effects to both employees and employers when there is misclassification about employment status. For employers, misclassification includes risks of unplanned employment taxes, worker’s compensation claims, and back wages. For the workers, classification as an employee provides federal government protections under the FLSA. These protections range from compensatory protections like minimum wage and overtime pay, as well as enforcement of labor standards, such as child labor laws and tip regulations. Independent contractors are not afforded the same range of federal protections but may be entitled to some state protections. Illinois recently enacted the Freelance Worker Protection Act (FWPA) in 2024, which provides protection for independent contractors where the value of their work is equal to or greater than $500 in a 120-day period. The protections covered under this act includewritten contracts outlining their work agreement, full payment for services outlined in the contract, and protection from retaliation and other negative action for exercising their rights.
Misclassification carries risks for both the worker and employer. The best solution to solving this issue is education. Both workers and employers should be aware of the differences between employees and independent contractors to ensure compliance with the FLSA and U.S. Department of Labor. There are many free resources, including frequently asked question websites and tip lines overseen by the U.S. Department of Labor (DOL) that can help both workers and employers with any questions. A common resource utilized by the Department of Labor are their “News Releases”. These provide the public with quick overviews with updates on current labor issues as well as contact information that employers and workers can utilize for more assistance. On May 1, 2025 the Department of Labor released a News Release on the misclassification issue and its current enforcement matters. Included in the release were links to other DOL resources like field assistance bulletins and fact sheets which provide more in-depth information and real-life examples on the issue. For larger corporations the use of in-house council, or outside employment law firms, can assist in developing policies for how companies should engage with independent contractors, as well as training managers and supervisors to ensure they understand the differences between the two classifications. By understanding the differences between independent contractors and employees, and the detriments of misclassification, workers and employers can be more diligent on ensuring correct classifications.