Hiring Freelancers? How To Avoid Worker Classification Mistakes

You just hired a freelancer for a two-week project. So, they should be classified as a freelancer, right? The short answer: Maybe.

Worker classification is a balancing act of circumstances. There are times when a freelancer can be classified as an employee, according to the latest standards by the U.S. Department of Labor (DOL). 

Misclassifying a worker can expose your business to tax penalties, wage claims, and more, so proper classification is important.

But don’t worry. Once you understand how to classify workers correctly, you can confidently hire freelancers and stay fully compliant.

In this guide, we’ll break down the basics without the legalese. You’ll learn:

• What worker classification compliance means
• Why getting it right matters
• The types of worker classifications
• How to determine worker classification status
• Quick differences: employees vs independent contractors (ICs)
• Tips to avoid worker misclassification risk
• Ways to get help

What is worker classification compliance?

Worker classification compliance is correctly identifying whether someone should be treated as an employee or an independent contractor.

Sounds simple, right? But the rules are full of nuance.

Someone might look like a freelancer by receiving a 1099, promoting their services as an “independent contractor,” and stating they’re a freelancer in their contract. But those labels aren’t enough. What actually determines their classification status is how they work with your business.

And that’s where things get tricky. A worker’s classification can shift depending on how much control you have over their work. So even if they’re working on a project basis, the way the work is structured could put them in employee territory.

Why worker classification matters

As an employer, how you classify a worker affects your legal and financial responsibilities. Misclassify someone as an IC when they should be an employee, and you could be liable for unpaid taxes, benefits, and penalties.

Independent contractors want to get classification right too because their status affects their taxes, benefits, and legal protections. For example, ICs do not qualify for overtime pay. But if they find out the project they’re working on puts them in employee status, they could be eligible for that benefit.

The two types of worker classifications

The two main worker classifications are employee and independent contractor. Here’s how the Internal Revenue Service (IRS) generally defines them:

• Employee. You control what they do and how they do it. Control may look like: saying they must go through specific training, work in your office, or work during specific hours.
• Independent contractor. They control how the work gets done. You have some say over the deliverables or outcome, but not the process.

Think of a dentist for example. Most of the time, they’re self-employed and work as independent contractors. So, you might pay them to pull a tooth, but you’re not telling them how to do it.

How to determine worker classification status

To prevent misclassification risk, be sure to classify a worker for each project or engagement. But figuring out that classification isn’t always cut and dry; it's more like balancing a bunch of factors at once.

The Fair Labor Standards Act (FLSA) outlines how to determine a worker’s classification. What they’re mainly looking for is control. The more control you have over how, when, and what work gets done, the more likely that person should be classified as an employee.

When determining a worker’s status, keep in mind that worker classification hinges on three areas of control, which we follow in the following sections.

1. Behavioral control

Do you have the authority to direct how the work gets done? Even if you’re not actively using that authority, do you still have it? For example:

• Do you set work hours or location?
• Do you provide instructions or training, specify the tools or supplies they use, or supervise how they work? (Hint: More detailed instructions signal control.)
• Do you require that they attend meetings?
• Do you use a system that monitors or evaluates their work (e.g., tracking the number of calls a customer agent handles per hour)?

2. Financial control

Do you have control over the financial or business side of their work? Signs you might be exercising a level of control that affects classification are:

• You reimburse work-related expense
• You provide equipment
• You generally guarantee the worker a regular cadence of pay (e.g., hourly, weekly, monthly)

Remember that independent contractors usually:

• Set their own rates
• Use their own tools
• Invoice by project or deliverable
• Are a business that could run at a profit or loss
• Publicly seek additional clients (e.g., business website, profile on Upwork, social media posts)

3. Relationship control

The nature of the working relationship really comes down to how both the business and the worker see and define their interaction. These are a few things that can shape that relationship: 

• Is there a clear end date like when a project wraps up or after a set period of time?
• Are you offering benefits like paid time off or health insurance?
• Does the contract clearly outline that it’s an independent contractor arrangement?
• Are they doing work that’s a core part of what the business regularly does?

Quick reference: 10 worker classification questions

Note: A yes or no to a single question may not alone determine classification status.

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How to avoid worker misclassification risks

The safest way to avoid misclassifying a worker is to treat independent contractors like the independent businesses they are. That means:

• Don’t set their work hours or location
• Don’t provide training or specific tools
• Don’t supervise or evaluate their performance like you would an employee
• Don’t prevent them from subcontracting the work or working with other clients

Stick to the what, not the how. You can absolutely negotiate deadlines and deliverables, but let them decide how to meet them.

This video shows a simple example of how to stay safe.

Ways to get worker classification help

Classification can be tricky and take up valuable internal resources. Instead of figuring it out yourself, consider these options:

Hire a freelance attorney

Hire an employment law attorney through a trusted freelance platform. On Upwork, you can get exactly the level of help you need—whether that’s just booking a one-time consultation or bringing on a legal pro to handle independent contractor classifications for you.

Use Enterprise compliance services

If you’re an Upwork Enterprise client, you can enroll in Classification Compliance. Supported by our award-winning legal team, we’ll determine worker classification for each engagement, review them within three days, and indemnify you from misclassification risk.

Use Upwork Payroll

Sometimes you need more control over how the work gets done, and we’ve got you covered here too. When a freelancer is classified as an employee, Upwork Payroll handles the admin side of things, like taxes and benefits, through a trusted third-party employer of record (EOR).

Final thoughts

Worker classification is critical but it doesn’t have to be intimidating. Once you understand how it works and where the boundaries are, you can confidently hire the talent you need without putting your business at risk.

And if you’re ever unsure? Bring in an expert. Upwork offers flexible options to get exactly the right amount of help to fit your needs.

Nothing in this article constitutes or is to be relied upon as legal advice. Relevant considerations and laws for classifying workers vary depending on the particular situation. Clients are encouraged to seek advice from their own legal advisors.