Contractor Classification Review
Know if your 1099 contractors should be W-2 employees before the DOL or IRS finds out
Misclassifying employees as independent contractors is one of the most common — and costly — compliance failures in American business. The DOL, IRS, and state agencies are actively auditing businesses, and the penalties include back taxes, unpaid benefits, overtime, and damages that can reach six or seven figures. Performance West reviews every contractor relationship in your organization against the IRS 20-factor test, the DOL's economic reality test, and applicable state tests (including California's ABC test, which applies even to out-of-state companies with California workers). We analyze the actual working relationship, not just the contract language. For each contractor, we provide a classification risk assessment (low, medium, or high risk of misclassification) with specific factors supporting our assessment and actionable recommendations for remediation.
Risk if non-compliant
One report called misclassification a 'sleeping giant' for Texas businesses. Penalties include back taxes, unemployment insurance, overtime, benefits, and liquidated damages per misclassified worker.
Potential penalties
- ⚠ Back employment taxes (employer share of FICA, FUTA)
- ⚠ State unemployment tax liability
- ⚠ Back-pay for overtime, minimum wage, and benefits
- ⚠ Liquidated damages (double back-pay under FLSA)
- ⚠ IRS Section 3509 penalty assessments
- ⚠ State penalties (California PAGA: $100-$200 per pay period per worker)
- ⚠ Class action exposure for multiple misclassified workers
What we deliver
- ✓ Review all contractor agreements and relationships
- ✓ Apply IRS 20-factor test to each relationship
- ✓ Apply DOL economic reality test
- ✓ Assess against state-specific tests (ABC test, etc.)
- ✓ Analyze actual working conditions vs. contract terms
- ✓ Provide per-worker risk assessment (low/medium/high)
- ✓ Deliver remediation recommendations
- ✓ Assist with reclassification if needed
Frequently asked questions
What's the difference between the IRS and DOL tests?
The IRS uses a 20-factor right-to-control test focused on the nature of the working relationship. The DOL uses an 'economic reality' test focused on whether the worker is economically dependent on the employer. Both can apply simultaneously.
Does this apply to gig workers?
Yes. Gig economy, freelance, and platform workers are among the highest-risk categories for misclassification. We apply all relevant tests regardless of industry.
What if we find workers are misclassified?
We provide a remediation plan including reclassification steps, back-tax obligations, and how to restructure the relationship to minimize future risk.
Can I classify someone as a contractor if they agree to it?
No. Classification is determined by the actual nature of the working relationship, not by the label on the contract. A signed contractor agreement does not override the legal tests.
Do you provide legal advice?
No. We provide classification risk assessments and remediation recommendations based on regulatory standards. For legal disputes, consult an employment attorney.
Ready to get started?
Contact us to discuss your compliance needs or request a quote.
Or call us: 1-888-411-0383