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Most business owners don’t realize this until it’s too late: your contractors (1099s) might actually be your biggest hidden liability – if they should instead be classified as W-2 employees.

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Over the last 6 months, I’ve seen:&nbsp;

High-growth companies blindsided by misclassification claims

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Deals slowed (or repriced) during due diligence

Owners shocked by retroactive wage + tax exposure

Execs surprised&nbsp;that EPLI didn’t cover classification&nbsp;claims

Employers handcuffed by the rapidly shifting employee/independent contractor analysis framework

Progress stalled due to misclassification claims and litigation

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“They signed an independent contractor agreement” is no longer a valid defense; rather, it can be a company’s costliest mistake. In 2025 alone, the United States Department of Labor recovered over $259 million in unpaid back wages largely attributable to misclassification – the most substantial annual recovery by the Department since 2019.<a href="#_ftn1" id="_ftnref1">[1]</a>

Now more than ever before, regulators and courts are questioning employers’ classification of workers as independent contractors – challenging the validity of independent contractor and consultant agreements by scrutinizing the nature and degree of the&nbsp;employer’s control over the worker’s work, the worker’s opportunity&nbsp;for profit and loss based on the worker’s own investment or initiative, and the worker’s freedom to take on other work.&nbsp;This analysis is made even more challenging for employers as the Department of Labor alters its classification guidance from administration to administration, creating a moving target for employers seeking to ensure compliance.<a href="#_ftn2" id="_ftnref2">[2]</a> Adding yet another layer of complexity to the analysis, companies in highly regulated states may face classification challenges that result from additional, and often more stringent, state-level classification rules.<a href="#_ftn3" id="_ftnref3">[3]</a>

Misclassification can result in IRS penalties, back wages, unpaid&nbsp;overtime, unpaid benefits, fines, and, in the event of willful misclassification, criminal charges; however, early identification of potential classification problems and voluntary efforts to comply with the Fair Labor Standards Act, tax law, and state classification laws can be a substantial factor in limiting an employer’s liability.

Smart owners are auditing before&nbsp;someone else does it for them.&nbsp;If a regulator reviewed your workforce tomorrow…would you be confident?

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<a href="#_ftnref1" id="_ftn1">[1]</a> U.S. Dep’t of Labor Wage and Hour Division, Fair Labor Standards Act, <a href="https://www.dol.gov/agencies/whd/data/charts/fair-labor-standards-act">https://www.dol.gov/agencies/whd/data/charts/fair-labor-standards-act</a> (last visited Mar. 17, 2026).

<a href="#_ftnref2" id="_ftn2">[2]</a> U.S. Dep’t of Labor, US Department of Labor Proposes Rule Clarifying Employee, Independent Contractor Status Under Federal Wage and Hour Laws, <a href="https://www.dol.gov/newsroom/releases/whd/whd20260226">https://www.dol.gov/newsroom/releases/whd/whd20260226</a> (last visited Mar. 17, 2026).

<a href="#_ftnref3" id="_ftn3">[3]</a> See California Dep’t of Industrial Relations, Independent contractor versus employee, <a href="https://www.dir.ca.gov/dlse/faq_independentcontractor.htm">https://www.dir.ca.gov/dlse/faq_independentcontractor.htm</a> (last visited Mar. 17, 2026); New York State Dep’t of Labor, Independent Contractors, <a href="https://dol.ny.gov/independent-contractors">https://dol.ny.gov/independent-contractors</a> (last visited Mar. 17, 2026).

Business professionals walking through a modern office space and ascending stairs during a busy workday.

Business professionals walking through a modern office space and ascending stairs.

Top Legal Issue (Last 6 Months)! – Employment Classification

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