Popular Government - Determining Whether a Worker Is an Independent Contractor or an Employee

Sep 16, 2026

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Popular Government examines how public employers should determine whether a worker is legally an independent contractor or an employee, especially as governments increasingly outsource core functions. The article outlines advantages employers expect from independent contracting while emphasizing that misclassification creates significant liabilities, including back overtime pay, IRS penalties, and exposure to lost benefit value. It summarizes applicable federal and state tests by using a hypothetical North Carolina county scenario, ending with guidance on positions that can be difficult to classify.

LanguageEnglish

CategoryGeneral

FormatPDF

Pages10

Reading Time4 min

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Determining Whether a Worker Is an Independent Contractor or an Employee

Employer advantages and legal risk of misclassification

Legal tests beyond the intent to contract

Hypothetical case: Paradise County’s dilemma

Right-to-control and economic reality frameworks

P O P U L A R G O V E R N M E N T Determining Whether a Worker Is an Independent Contractor or an Employee Diane M. Juffras F ollowing the lead of the private sector, which is increasingly outsourcing core functions, govern- ment employers are more often turning to independent contractors (sometimes referred to as “contract employees”) to perform work traditionally done by employees. Some of the advantages that employers see are these: • Having more flexibility in matching workers’ skills to employers’needs. Engaging workers as independent contractors allows employers to add and subtract personnel on an as-needed basis for shorter-term projects requiring specific skills. • Not having to pay benefits. Employees are generally entitled to participate in the fringe benefit plans that the employer offers. In North Carolina this includes participation in the Local Government Employee Retirement System (LGERS) or the Teachers and State Employees Retirement System (TSERS), as well as in the employer’s health insurance benefit plan. Independent contractors are not generally eligible for participation in benefit plans. • Being able to tap the expertise of retired employees. Engaging former employees as independent contractors allows employers to obtain the services of experienced workers familiar with the organization who do not want to jeopardize their retirement benefits by returning to work full-time as employees. The author is a School of Government faculty member who specializes in public employment law. Contact her at juffras@ [sog.unc.edu](sog.unc.edu). Not just any worker can be classified as an independent contractor, however.“Independent contractor” is a distinct legal status determined by factors that go beyond an employer and an employee’s common desire to contract for work on that basis. For example, both the U.S. Department of Labor, which administers federal overtime law, and the Internal Revenue Service (IRS), which oversees employee federal income tax withholding and Social Security and Medicare payroll contributions, have specific tests for determining whether a worker is an employee or an independent contractor for overtime and tax purposes. Federal and state antidiscrimination laws and state statutes governing who qualifies for workers’ compensation and unemployment benefits use similar tests. Few hiring relationships meet the legal test for independent contractor status. Employers who misclassify workers as independent contractors may incur significant (and unbudgeted) liabilities, such as back overtime pay, IRS penalties, and liability for the value of lost benefits. This article summarizes the factors that a public employer should consider in determining whether a worker legally qualifies for independent contractor status or must be classified as an employee.1 Each of the relevant legal factors is discussed through the example of a hypothetical North Carolina county that has just engaged the services of three new workers. The article concludes with a discussion of certain government positions whose correct classification is sometimes difficult. Agreement to Work as an Independent Contractor Not Legally Significant Paradise County’s Dilemma Paradise County needs an additional sanitation worker in its public works department, an additional visiting nurse in its health department, and an additional accounting technician in its finance department. In each case the new position would have the same job duties as already-existing positions. The county commissioners do not think it possible to fund all three requests. Rather than choose among the requests, they allocate enough money for each of the three departments to add an additional worker on what the commissioners call an “independent contractor” basis: the workers are to be paid at an hourly rate but will not receive any benefits from the county. The public works, health, and finance departments advertise for and hire workers, who

FAQs

Why do public employers use independent contractors instead of employees?

Public employers look for flexibility in matching skills, avoiding benefit obligations, and tapping expertise of retired workers who do not want to return full-time.

What makes “independent contractor” a distinct legal status?

Independent contractor status depends on legal factors and tests that go beyond an employer and worker’s shared desire to contract on that basis.

What problems can arise from misclassifying workers as independent contractors?

Misclassification can trigger liabilities such as back overtime pay, IRS penalties, and liability tied to the value of lost benefits.

Sep 16, 2026

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