The use of nonemployee workers is more prevalent than ever, and challenges to these relationships are growing just as rapidly. Entire business models are at stake.

The Internal Revenue Service (IRS), the Department of Labor, the National Labor Relations Board, state governments, and the plaintiffs’ bar have made it a priority in 2016 to attack the legitimacy of independent contractor relationships, claiming that many of these workers are really employees. Staffing agency workers may be deemed joint employees as well.

Government audits, investigations, and class action misclassification lawsuits have become rampant. Is your company exposed?

Who Is My Employee?

Parties cannot contract out of employment, tax, and benefit laws. The legal analysis of whether a worker is an employee therefore depends on the facts of the engagement, not what the parties call the relationship. A signed independent contractor agreement may be of little value if the nature of the relationship resembles employment.

Wage and hour laws, tax withholding requirements, employee benefit requirements, and other employment laws apply only to employees, not to independent contractors. A finding of misclassification, therefore, can mean that the full range of employment laws, tax laws, and benefit plan requirements that a company assumed were inapplicable suddenly apply. The consequences of past noncompliance can be staggering, both financially and in terms of disruption of a company’s business model.

Major lawsuits in 2015 against Uber and Lyft allege that independent contractor drivers were misclassified and, instead, are really employees under various employment laws. Delivery companies and retailers have been hit with similar lawsuits, alleging that their independent contractor drivers and installers are also misclassified. Even professional cheerleaders and exotic dancers made headlines in 2015 as class action plaintiffs.

What Employers Should Do Now

The tests for determining who is an employee vary by law, by state, and sometimes by industry. Federal tests differ from state tests. IRS tests differ from wage and hour tests. Unemployment tests differ from workers’ compensation tests. Companies may find the same relationship subject to 10 or more tests in a single state, with different outcomes sometimes possible under different tests. Multistate employers face the same problem, multiplied several times.

Because of the range of tests and the various ways that misclassification claims can arise, organizations should review and (in many instances) revise their relationships and contracts with nonemployee workers. Those that ignore the risks may be dragged into the misclassification morass, with limited defenses.

The consequences of misclassification can include fines, penalties, back taxes, back wages, assessments, and attorneys’ fees that can quickly reach seven figures or more. A finding of systemic misclassification can substantially affect the financial strength of large organizations and can bankrupt smaller ones.

Todd Lebowitz’s white paper, “Independent Contractor Misclassification: 2016 Legal Analysis,” examines the legal landscape for companies that use independent contractors and other nonemployee workers. It identifies advantages and disadvantages of the contractor model, analyzes the legal tests and risks, and provides 10 takeaways for companies that are using nonemployee workers.

Companies that plan ahead can often improve their chances of surviving a misclassification challenge. Although contractor misclassification claims are becoming increasingly difficult to defend, companies that are well prepared in 2016 will be better positioned to defend – or prevent – class action lawsuits and government actions alleging that independent contractors are employees in disguise.