It’s not uncommon for companies to misclassify workers, often unintentionally. For example, individuals may be classified as 1099 contractors when they should legally be classified as W-2 employees. These misclassifications can prompt employee wage and hour claims, IRS penalties, and penalties from the US Department of Labor (DOL).
Over the last several years, the Wage & Hour Division (WHD) of the DOL has gone back and forth on the rules to classify workers correctly. In 2024, the DOL redefined how workers are classified as employees or independent contractors. This rule alters the economic reality test, the standard used under the Fair Labor Standards Act (FLSA) to determine a worker's financial dependence on an employer. However, on May 1, 2025, WHD announced it would not enforce the 2024 rule and instead would revert to the traditional economic realities test. Here are several key factors that outline the classification differences.
Required to comply with employer’s instructions about when, where, and how to work
Sets own hours; determines own sequence of work
Works exclusively for the employer
Can work for multiple employers; services available to the public
Hired by the employer
Is self-employed
Subject to dismissal; can quit without liability
A contract governs how the relationship can be ended
Has a continuing relationship with the employer
Works by the job
Personally completes work
Permitted to employ assistants
Performs services under the company’s name
Performs services under the worker’s business name
Paid a salary; reimbursed for expenses; participates in company’s fringe benefits programs
Payment by the job; opportunity for profit and loss
Furnished tools, equipment, materials, and training
Furnishes own tools, equipment, and training; substantial investment by the worker
Work performed is integral to the primary business model
Work being performed is not integral to the primary business
Converting a 1099 contractor to a W-2 employee isn’t just a business decision — it’s often a legal necessity. Federal and state agencies are ramping up enforcement, and businesses that misclassify workers face back taxes, penalties, unpaid overtime claims, and potential class-action lawsuits.
Our team helps you assess each contractor’s risk level, determine if conversion is warranted, and execute a clean transition that aligns with applicable employment laws.
✓ You exert control over their work hours, tools, or location
✓ The contractor performs work that is integral to your core business
✓ You’ve had the same individual working regularly for months (or years)
✓ You want to reduce risk exposure before a state or IRS audit
· IRS 20-Factor Test
· DOL’s Economic Realities Test (FLSA)
· State-level ABC Tests
✗ Reimbursement of unpaid wages and benefits
✗ Double payment of employment taxes
✗ Fines from the IRS, DOL, or state agencies
✗ Disqualification from government contracts
Our team helps you assess each contractor’s risk level, determine if conversion is warranted, and execute a clean transition that aligns with applicable employment laws.
Converting a contractor to a W-2 employee often raises the question: “What will it cost?”
On average, converting a contractor to a W-2 employee increases total cost by 20–35%. But the savings in legal risk and retention often outweigh the extra expense.
✓ Current contractor rate
✓ Employment taxes (Social Security, Medicare, FUTA/SUTA)
✓ Benefits (health insurance, PTO, 401(k))
✓ Workers’ compensation and EPLI coverage
✓ Administrative overhead
✓ State unemployment tax rate
Fill out the form below and our expert team will help you quantify the cost estimate.
Our Employment Law Team is here to provide personalized guidance and support to help Aspen HR clients navigate the complexities of human resources management.
✓ Optimize your workforce
✓ Mitigate risks
✓ Drive organizational success
* The IRS does not endorse any particular certified professional employer organization. For more information on certified professional employer organizations, go to www.IRS.gov.
