What is Employee Misclassification?
Nearly 500 construction workers in Washington, D.C. showed up to their job sites and worked long hours every day. But when payday came, something was missing. No overtime pay for extra hours. No paid sick leave when injuries happened on the job. No unemployment insurance if projects ended abruptly. Despite following the company schedules and adhering to strict protocols, these workers were labeled "independent contractors." In December 2025, they won a $1.5 million settlement after years of being misclassified.
Employee misclassification occurs when a worker is incorrectly classified as an independent contractor instead of an employee, which deprives them of essential benefits, protections, and proper tax treatment. This error can result in severe consequences for employers, including substantial penalties, back wages, legal fines, and reputational damage. Misclassification can arise from a misunderstanding of complex local labor laws or, at times, from the intentional desire to reduce costs by avoiding employer obligations such as insurance, workers’ compensation, overtime pay, and other statutory benefits.
Employee vs Contractor
- Employee: An employee is hired by an employer to work under a specific arrangement, typically 40 hours per week, and is protected by local labor laws. Employees are entitled to minimum wage, health benefits, paid time off (PTO), overtime pay, retirement plans, and other employer-provided benefits. Their work is usually closely supervised by the employer.
- Contractor: A contractor is a self-employed individual hired for a specific project or contract. Contractors have greater control over their working hours and methods. They are responsible for their own taxes and typically do not receive the same benefits and protections as employees.
What Determines Employee Misclassification?
To determine whether an employee has been misclassified as a contractor, you need to evaluate the working relationship. While factors vary depending on local laws, the following are common grounds for misclassification.
- Wages and Benefits: Employees are entitled to minimum wage laws and comprehensive benefits, including medical insurance, PTO, retirement plans, and overtime pay. Contractors are typically not entitled to these benefits.
- Control: If the employer dictates when, where, and how the worker performs tasks, it typically indicates an employee relationship. Contractors generally enjoy more freedom in determining their working hours and location.
- Schedule: Employees are usually expected to work a fixed schedule, often 40 hours per week, while contractors have more flexibility.
- Equipment: Employees typically use equipment provided by the employer to perform their tasks, whereas contractors usually provide their own tools and resources.
What Are The Consequences of Misclassification?
Misclassification can have massive consequences for the employer.
Legal penalties and compensation: Misclassified employees may be entitled to back wages, benefits, and additional compensation, resulting in hefty fines and penalties for the employer. Penalties are more severe if misclassification is deemed intentional.
Lawsuits: Employees may file lawsuits seeking compensation for unpaid wages, benefits, or taxes that were owed to them under their misclassified status.
Damaged reputation: Misclassification can severely damage a company’s reputation, erode employee trust, and make it more difficult to attract top talent.
Employee misclassification poses a massive risk for companies. (Source: Pexels)
Real Examples
Case 1: Virginia
In August 2025, a Virginia-based healthcare staffing firm was found to have misclassified approximately 1,100 nurses as independent contractors. Although labeled as contractors, the nurses were required to complete employment applications and undergo background checks and drug screenings. They performed the same duties as regular employees, were supervised by physicians, and worked set schedules while adhering to the firm’s workplace policies. Additionally, the nurses had no ability to negotiate their hourly pay rates. Following litigation, the court determined that the nurses had been improperly classified, resulting in a $9.3 million settlement and the payment of unpaid overtime compensation.
Case 2: New Jersey
In September 2025, a New Jersey–based logistics company agreed to pay $5.75 million to settle a worker misclassification lawsuit. For more than a decade, over 100 truck drivers were classified as independent contractors, despite having fixed driving routes and being monitored through the company’s communications tracking system. Although the company exercised significant control over their work, drivers were required to pay for their own workers’ compensation, liability coverage, and other job-related insurance. Under the settlement, affected drivers were expected to receive payouts of up to $30,000 each.
Case 3: New Jersey
Also in September 2025, a rideshare platform resolved a multi-year misclassification case involving more than 100,000 workers. State officials determined that the workers were improperly classified as independent contractors and were therefore denied access to family leave, unemployment insurance, and disability benefits. The settlement requires the company to pay $10.8 million in unpaid unemployment, family leave, and disability fund contributions, along with $8.5 million in penalties and interest.
Case 4: California
In October 2025, a California judge ordered a home-care company to pay $10 million in restitution and civil penalties for misclassifying hundreds of workers as independent contractors. The misclassified workers were denied fair wages and basic labor protections and were subjected to unlawful no-poach agreements. The court found that the misclassification had persisted for several years.
Case 5: Minnesota
In November 2025, a Minnesota-based same-day delivery service reached an $800,000 settlement after the state found it had improperly classified its delivery drivers as independent contractors. The employer exercised granular control over drivers’ work, including setting markups for goods ordered through the platform and restricting how workers could communicate. As a result of the misclassification, drivers were denied minimum wage and overtime protections, unemployment benefits, workers’ compensation, and local sick-leave entitlements.
How Niural Helps
Niural simplifies the complex challenge of contractor and employee classification with advanced AI-driven tools to ensure compliance.
Niural PEO helps businesses manage workers' payroll with comprehensive benefits and automatic compliance checks. This includes handling W-2s, workers’ compensation, payroll processing, and more, all in one system.
Niural Contractor Management ensures that true contractors remain compliant with local laws and are paid accurately and on time. The platform uses real-time checks to flag potential misclassification when a contractor's working relationship starts to resemble that of an employee.
- Key Benefits:
- Contractor Controls: Through the Agent of Record (AOR) service, Niural ensures that contractors are treated correctly and ensures ongoing checks to reduce misclassification risks.
- Reduced Administrative Burden: Niural simplifies benefits management, workers' compensation, and payroll administration, allowing businesses to focus on core activities.
Employee misclassification can lead to severe legal, financial, and reputational consequences. With the complexity of local and global employment laws, businesses must stay vigilant to ensure proper classification. Niural’s PEO and Contractor Management services help companies navigate these challenges by offering automated compliance tools, reducing administrative overhead, and ensuring workers are properly classified and compensated. By leveraging Niural’s AI-powered solutions, businesses can avoid costly mistakes and maintain compliance while scaling efficiently across multiple regions.
