What Is Worker Misclassification: The Compliance Risk Most Companies Underestimate

Worker misclassification is far more widespread—and financially damaging—than most business leaders realize. The National Employment Law Project reports that between 10% and 30% of U.S. employers incorrectly classify employees as independent contractors, affecting millions of workers across industries and regions.  

Similar coemployment issues exist worldwide, with many countries grappling with the risks and consequences of misclassification. 

The financial consequences are staggering. Consider these real-world examples: FedEx paid $228 million to settle a single California misclassification lawsuit involving just 2,300 drivers. Meanwhile, two Massachusetts construction companies faced $2.36 million in fines for misclassifying 400 employees.  

These aren’t one-off events—they’re cautionary tales for any organization that works with independent talent. 

Understanding the Basics: Employees vs. Independent Contractors

At the heart of proper classification is one key question: Who controls how the work gets done? 

With employees, your company doesn’t just define what needs to be accomplished. You also direct the day-to-day details of how the work is performed. Employees follow your processes, use your tools, and take instruction from your managers. 

Independent contractors operate with more autonomy. These professionals—freelancers, consultants, or other specialized experts—are hired for their specific expertise. They manage their own workflows, choose their own tools, and decide how to deliver the agreed-upon results. You can define the outcome but dictating how they get there can cross the line into misclassification territory. 

Learn More: W-2 Employee vs 1099 Independent Contractors: Pros and Cons 

Why Worker Classification Gets Complicated

Classifying workers isn’t always straightforward. What qualifies someone as an independent contractor under one law might make them an employee under another. Different jurisdictions have different tests and standards—and that inconsistency can create serious issues. 

For businesses, the risks of getting it wrong are real: 

• Hefty financial penalties that can reach into the millions 
• Lengthy legal battles that drain time, energy, and focus 
• Reputation damage that can affect customer trust and your ability to attract top talent 
• Costly back payments for unpaid taxes, wages, and benefits—with interest 

Bottom line: A simple mistake of misclassification can ripple through your business in ways you didn’t expect. 

Discover: The Impact of Worker Misclassification on Your Company’s Credibility 

Building a Strong Workforce Compliance Program

Creating an effective contractor compliance program is essential for success. Consider these key components: 

Solid Legal Framework

Keep current on federal, state, and local laws—especially if you operate in more than one region. Rules change often, and staying ahead helps you avoid surprises. 

Clear Policies and Procedures

Make legal requirements practical for your teams. Your internal guidelines should clearly spell out: 

• How to engage and onboard new contractors 
• How to manage day-to-day interactions 
• How to wrap up the relationship when work is done 
• What documentation to collect and keep 

Ongoing Training

Your internal teams need to know more than just the rules—they need to understand why those rules matter. If they see the business impact of misclassification, they’re more likely to stay alert and follow the right steps. 

Regular Audits

Contractor roles can shift over time. What starts as a properly classified project can evolve into something riskier. Build in periodic reviews to catch changes before they create problems. 

Explore: 3 Benefits of Creating a Compliance Program for Your Organization  

The Value of Expert Partners for Contingent Workforce Management

Even with a strong internal program, you don’t have to manage classification risk alone. Partnering with an experienced talent solutions provider can add an extra layer of protection and peace of mind, especially as your contractor needs grow more complex. 

Organizations like MBO Partners offer: 

Proven Systems and Processes

Tap into established platforms built specifically for contractor engagement. From classification checks to documentation tracking and risk assessments, these tools help you stay organized and compliant. 

Expert Guidance

Work with teams that understand compliance inside and out. They’ll help you make sense of shifting regulations, navigate challenging classification decisions, and stay confident you’re on solid ground. 

Structured Contractor Relationships 

Get support building contractor relationships that are productive, professional, and legally sound. The right partner helps you maintain clear boundaries with contractors while still gaining the full value of their skills and expertise. 

Scalable Solutions

As your business grows or expands internationally, your contractor strategy needs to scale with it. An experienced partner can help you do that—while minimizing risk and ensuring consistency. 

MBO Partners Supports Your Workforce Compliance Efforts

The way we work is changing—and getting classification right is more important than ever. Investing in compliance doesn’t just protect your business. It lays the groundwork for long-term success with a workforce that’s agile, skilled, and ready to meet the moment. 

For more information on contingent workforce management and the benefits of working with independent contractors, visit our resource center for insights on workforce compliance, contractor engagement strategies, and the latest technologies shaping the future of work. 

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.