When companies hire both permanent employees and independent contractors (ICs), properly classifying workers can result in a lot of frustration and confusion.
Worker classification remains one of the most complex compliance challenges in 2025, especially as workforces become more distributed, flexible, and global.
The rise of remote work, AI-powered platforms, and new state and federal rulings have raised the stakes for getting it right.
Misclassification can lead to severe legal, financial, and reputational consequences. So whether you're a startup hiring freelancers, a multinational firm scaling a remote team, or an HR leader navigating hybrid talent models, knowing fact from fiction is critical.
Below, we debunk 10 common myths around worker classification to help your company stay compliant—and future-ready.
Not in the eyes of the law (and, for better or worse, those are the only set of eyes that matter)
In 2025, most jurisdictions rely on multi-factor tests like the IRS Common Law Test, ABC Test (e.g., California), or economic realities test (DOL), which weigh actual working conditions over contractual language. Even an ironclad contract can't override the real-world nature of the relationship.
Tip: Schedule periodic audits of all working relationships to ensure they align with what’s on paper.
Different regulating bodies may use different tests to determine worker classification. As a result, a worker could be considered an IC under one set of regulations but an employee under another.
A worker could be considered an IC by the IRS, but an employee under state law (e.g., Massachusetts or New Jersey), or even under international frameworks like the EU Platform Work Directive.
Companies must ensure they are aware of any compliance requirements that pertain to them, no matter from whom they are issued.
Not true. Enforcement has increased in 2025, especially as federal and state governments continue to crack down on tax evasion and misclassification in remote-first workplaces.
Regulators may want to perform audits based on complaints from workers, applications for workers compensation or unemployment insurance, or even if the company is listed on a 1099 as a sole employer and appears to be paying a full-time income. Simply issuing a particular tax form to an IC doesn’t equate to legally accurate classification, regardless of the nature of the industry or volume of ICs employed.
Audits can be triggered by:
A word of caution: it only takes one worker complaint to unravel classification processes across your entire workforce.
Not to summon your mother but...If everybody else jumped off the bridge, would you?
This “everyone else is doing it” logic doesn’t hold water. In fact, being part of a misclassifying industry (e.g., rideshare, home services, staffing) can increase scrutiny. Courts and regulators look at your company’s practices—not others'.
This varies.
Many states now allow workers who were misclassified as ICs to retroactively qualify for unemployment. If a court or agency determines the worker was de facto an employee, the company may be on the hook for back taxes and penalties.
The IRS places tremendous importance on worker classification, mainly because it affects taxes applicable to earnings.
Failing to correctly classify workers, regardless of how well intentioned the company is, can result in unwanted outcomes, so it’s important to ensure all guidelines are strictly adhered to. Inaccurate classifications cost governments billions, which is why enforcement is tightening in 2025. Don't get bit by the DOGE.
Pro Tip: In some states, tax platforms now report “suspicious” 1099 activity automatically, flagging potential misclassification.
Casually engaging workers for small or temporary projects might feel like formal processes and worker classification aren’t necessary, but this could not be further from the truth.
In reality, the real-life working conditions of both the employer and worker influence how that worker should be classified, and leaving workers off the books can be perceived as tax evasion.
Digital payment apps (e.g. Zelle, Venmo) now report transactions over $600 to the IRS under new 1099-K rules (as of 2024). Paying workers off the books is not only illegal—it increases audit risk and opens you up to wage theft claims, tax fraud investigations, and labor lawsuits.
False.
U.S.-based companies are still subject to U.S. laws regardless of where work is performed. Likewise, overseas workers may be subject to local labor laws, which may interpret “IC vs. employee” differently—and may even require setting up local entities or using compliant EORs.
Understanding common misconceptions around worker classification is an important first step in creating effective long-term compliance success.
Companies that are serious about regulatory compliance should consider consulting with a local employment council or partnering with a proven compliance expert. Worker classification policies will assuredly continue to change over time, requiring continuous monitoring in order to avoid misclassification pitfalls.
HireArt is standing by to help your organization get the most out of its contract workforce experience while providing important indemnification for compliance-related issues.
HireArt is a contract workforce operating system that lets companies source, employ, and manage top-performing contract workforces. We provide our clients with the tools and visibility needed to easily manage their contract workforce and staffing vendors in a single seamless, instantly-deployable platform.
