This article was updated in July 2026 to reflect current statistics related to employees who are misclassified as independent contractors.

Are you unsure if you are an employee or an independent contractor? It is not uncommon that actual employees are misclassified as independent contractors, and then denied their rightful minimum wage, overtime pay, and other protections.

A recent study from the Economic Policy Institute confirms that misclassifying workers as independent contractors is costly for workers as well as social insurance systems, and that as many as 10% to 30% of employers misclassify their workers.

What Is Misclassification?

Misclassification occurs when an employer treats a worker who is an actual employee as directed under the FLSA as an independent contractor. Misclassifying employees as independent contractors is a serious problem because misclassified employees may not receive the minimum wage and overtime pay to which they are entitled under the FLSA or many other benefits and protections they are entitled to under the law, according to the DOL.

In addition to hurting employees, misclassification shifts the full burden of social insurance — like Social Security and Medicare — to workers, while also reducing the total revenues received by the social insurance system, according to the study. Further, estimates indicate that social insurance systems can lose up to roughly 30% of per-worker revenue when workers are misclassified as independent contractors.

The Fair Labor Standards Act

Employees are entitled to minimum wage and overtime pay protections under the Fair Labor Standards Act (FLSA) (learn more about the FLSA here) when there is an employment relationship between the worker and an employer and there is coverage under the FLSA, according to the U.S. Department of Labor (DOL). Employers are responsible for determining whether a worker is an employee (or an independent contractor) under the FLSA. However, employees often are “misclassified” as independent contractors and may not receive the benefits otherwise are entitled to.

The study indicates misclassified workers face the following risks:

• they are stripped of minimum wage and overtime protections;
• they are no longer eligible for unemployment insurance or workers’ compensation;
• they do not qualify for paid sick or family leave, even in places where those benefits are statutorily prescribed for employees, and they are extremely unlikely to receive employer-provided health insurance or retirement benefits;
• they are no longer protected by the National Labor Relations Act, which ensures workers’ rights to form unions and bargain collectively to improve their working conditions;
• individuals may not be covered by certain anti-discrimination and workplace protection laws that apply specifically to employees; or
• they must assume the full financial cost of Social Security and Medicare contributions, rather than split it evenly with their employer.

Protecting Employees From Misclassification

A recent final rule from DOL aims to reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves. “Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act. RIN 1235-AA43” provides guidance on how to analyze whether a worker is an employee or independent contractor under the FLSA. Essentially, the rule aims to reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.

Specifically, the rule addresses factors that guide the analysis of a worker’s relationship with an employer, including

• any opportunity for profit or loss a worker might have;
• the financial stake and nature of any resources a worker has invested in the work;
• the degree of permanence of the work relationship; the degree of control an employer has over the person’s work;
• whether the work the person does is essential to the employer’s business; and
• a factor regarding the worker’s skill and initiative.

The study also indicates that, in addition to the federal DOL rule, in 2025 and 2026, lawmakers in at least 12 states proposed or passed legislation to address worker misclassification. Most recent state efforts have focused on increasing accountability of employers that misclassify workers, bolstering remedies for workers subject to illegal misclassification, and strengthening enforcement capacity.

Am I an Employee or an Independent Contractor?

How do you know if you are an employee or an independent contractor? And if you are a misclassified employee, what can you do? To start, determine your status.

Employees: According to the DOL, an employee:

• works for someone else’s business;
• generally can only earn more by working additional hours;
• typically uses the employers’ materials, tools and equipment;
• typically works for one employer or may be prohibited from working for others;
• has a continuing or indefinite relationship with the employer;
• is directed by the employer as to how and when the work will be performed; and
• is assigned by the employer the actual work to be performed.

Independent contractors: An independent contractor, according to the DOL, is:

• in business for themselves;
• can increase profits through business decisions;
• typically provides their own materials, tools and equipment, and uses them to extend market reach;
• often works with multiple clients;
• has a temporary relationship with the client until a project is completed;
• decides how and when they will perform their work; and
• decides what work and projects they will take on.

Employer Responsibility

Employers should be aware that if they hire individuals as independent contractors who should instead be classified as employees, they may be held liable for failure to pay overtime and minimum wage under the FLSA and applicable state wage laws.

The statute of limitations for an individual to file a wage claim under the FLSA is two years for a non-willful violation and three years for a willful violation, and both criminal penalties and liability for back wages may be levied against employers and executives found in violation of FLSA laws, according to ADP.

Further, potential civil liability exposure for companies that misclassify workers exist, and employers found in violation may incur penalties, including unpaid overtime costs and minimum wage deficits, in addition to liquidated damages equal to unpaid wages and attorney fees.

What to Do if You Are a Misclassified Employee

If you are an employee who has been misclassified as an independent contractor, it is advisable to contact a knowledgeable employment attorney. An employment attorney can help you gain an understanding of the unique difficulties each workplace conflict presents and work toward a solution that benefits you.

Tully Rinckey attorneys have the experience to assist both employees and employers in achieving their objectives, regardless of the matter, which may include employment misclassification, discrimination, sex harassment, or any other claim involving worker rights or employer responsibilities. Call 8885294543 or contact us online today for a consultation and get an advocate who will fight for your rights and help secure your career and your future.

Amanda L. Smith, Esq. is a Partner in Tully Rinckey PLLC’s Buffalo office, where she focuses her practice on Federal and State Employment and Labor Law.