Let’s clear up one of the most persistent—and confusing—phrases in the workplace: “1099 employee.”  THERE. IS. NO. SUCH. THING.

A worker is generally either an employee or an independent contractor. A Form 1099 does not create an employment classification. It is simply a tax reporting form used for certain payments to non-employees. If a worker is properly classified as an independent contractor, the business generally reports qualifying payments for services on Form 1099-NEC. If the worker is an employee, wages generally are reported on Form W-2. So, when someone says, “She’s a 1099 employee,” that should be your cue to pause—and perhaps gently reach for the phone to call your employment lawyer.

Independent Contractor or Employee? The Difference Matters.

A legitimate independent contractor is generally operating an independent business and providing services different from those of its clients and customers. The contractor typically handles their own taxes and does not participate in the client's employee benefit programs simply by virtue of providing services. The IRS looks at factors such as behavioral control, financial control, and the overall relationship between the parties when determining whether someone is an independent contractor or employee.

An employee, on the other hand, is part of the employer's workforce. Depending on the applicable law and the employee's eligibility, employees may receive benefits such as group health insurance, retirement plan participation, paid time off and other benefits. Employees also receive the protections of applicable federal, state and local employment laws—including, where applicable, wage and hour, discrimination, leave, unemployment, worker’s compensation and other workplace protections.

“But She Asked to Be a 1099!”

We hear this one fairly often. A worker may say, “I'd rather be a contractor. Just pay me as a 1099.” Unfortunately, employment classification is not a ”choose your own adventure.” An employer cannot make a worker an independent contractor simply because the worker requests it, agrees to it,signs a contract saying so, or prefers the tax treatment. Likewise, callingsomeone an “independent contractor” does not make it so. The IRS, the U.S. Department of Labor, and numerous other federal and state agencies make clear that the substance of the working relationship—not the label—is what matters. In other words, you cannot turn an employee into an independent contractor through paperwork alone.

So, What Makes Someone an Independent Contractor?

There is no single magic factor. Different laws use different tests, and the analysis depends on the circumstances. For federal tax purposes, the IRS looks at the degree of control and independence between the business and the worker, including behavioral control, financial control and the nature of the relationship. Under the Fair Labor Standards Act, the Department of Labor looks at the economic reality of the relationship—among other things, whether the worker is economically dependent on the business or is actually operating an independent business. State laws may have their own tests. The analysis can be complicated, particularly when the worker performs the same type of work as the company's employees, works regularly or exclusively for the company, uses company equipment or systems, or is subject to significant direction and control by the company.

Unfortunately, even an agreement alone does not determine classification. The DOL specifically identifies as a myth the idea that receiving a 1099—or even signing an independent contractor agreement—automatically makes someone an independent contractor.

Why Should Employers Care?

Because misclassification can become expensive—especially when no one thinks about it until something goes wrong. A worker who has happily accepted 1099 payments for two years may become considerably less happy when the relationship ends.

• Maybe there was a serious disagreement.
• Maybe the worker believed they weren’t paid correctly.
• Maybe the worker was injured.
• Maybe the worker wants unemployment benefits.
• Maybe the worker claims harassment or discrimination.
• Maybe the worker wants to participate in the company's benefit plans.
• Or maybe the IRS, Department of Labor or a state agency is looking for revenue.

The Cost of Getting It Wrong

Misclassification can expose an employer to claims for unpaid wages and overtime, taxes and penalties, unemployment or workers' compensation obligations, employee benefits, and other statutory rights and protections, depending on the circumstances and applicable law. There can also be attorneys' fees, agency investigations, litigation costs, back pay, penalties and the administrative headache of reconstructing years of payroll and employment records.

Don't Let the 1099 Form Make the Decision for You

Before deciding to pay someone as an independent contractor, companies should take a step back and evaluate the actual relationship.

Ask:

• Is the worker truly operating an independent business?
• Does the worker have other clients or customers?
• Who controls how the work is performed?
• Who provides the tools, equipment and systems?
• Can the worker realize a profit or suffer a loss?
• How permanent is the relationship?
• Can the worker work for anyone else during the period of the relationship?
• Is the worker performing a key part of the company's regular business?
• What do the applicable federal, state and local laws say?

Bottom Line

Before deciding how to pay a worker, make sure you know how the worker is classified under applicable law. It is considerably easier—and generally less expensive—to get the classification right at the beginning than to defend it after the relationship has ended. And let's retire the phrase “1099 Employee.”

Have questions about whether a worker should be classified as an employee or independent contractor? Contact an RKW Law Group employment lawyer before the 1099 hits the mailbox.