Classifying Workers Correctly in 2025

Navigating employee vs contractor classification rules has become increasingly complex for HR professionals in 2025, especially with recent regulatory changes and ongoing enforcement uncertainty. 

This article provides HR professionals with current guidance on worker classification standards, addresses common misclassification pitfalls, and offers practical strategies for compliant decision-making. You'll learn how to apply both IRS and Department of Labor tests effectively while protecting your organization from costly penalties.

Understanding the Current Regulatory Landscape

Worker classification in 2025 operates under a complex framework of federal and state regulations, with significant recent changes affecting enforcement practices. The Department of Labor announced in May 2025 that agency investigators are directed not to apply the 2024 rule's analysis in current enforcement matters, creating uncertainty for HR professionals who must navigate between multiple testing standards.

The regulatory environment now requires HR professionals to understand three primary classification systems: the IRS Common Law Test, the Department of Labor's economic realities test, and various state-specific standards. Under the DOL's approach, if the economic realities show that the worker is economically dependent on the employer for work, then the worker is an employee, while the IRS focuses on behavioral control, financial control, and relationship factors.

Consider a technology company hiring software developers: under the IRS test, a developer who works set hours using company equipment and follows detailed project specifications would likely be classified as an employee. However, a developer who maintains their own office, invoices multiple clients, and determines their work methods would more likely qualify as an independent contractor.

HR professionals must evaluate workers under multiple regulatory frameworks simultaneously, as different agencies may reach different conclusions about the same working relationship.

The High Cost of Misclassification Mistakes

One of the most dangerous assumptions HR professionals make is treating worker classification as a simple administrative decision rather than a legal determination with significant financial implications. The misclassification of employees as independent contractors may deny workers minimum wage, overtime pay, and other protections, creating substantial liability for employers.

The financial consequences of misclassification extend far beyond back wages. According to the Department of Labor, companies face potential liability for:

• Unpaid overtime compensation and minimum wage violations

• Employer share of Social Security and Medicare taxes

• Unemployment insurance contributions

• Workers' compensation premiums

• Employee benefits that should have been provided

• Penalties and interest on unpaid amounts

A recent case illustrates these risks: a mid-sized construction firm misclassified 63 employees as independent contractors, only to face a Department of Labor investigation resulting in $594,000 in back wages and penalties. The workers had been required to work specific hours, use company-provided equipment, and follow detailed content guidelines—clear indicators of employee status under the economic realities test.

The solution to this would be to implement a systematic classification review process that evaluates each worker relationship against all relevant legal standards before making hiring decisions, rather than retrofitting classifications after workers are already engaged.

Applying the Three-Factor IRS Test in Practice

The IRS classification system provides the most structured approach for HR professionals, focusing on three core areas that determine worker status. The facts that provide this evidence fall into three categories – behavioral control, financial control, and relationship of the parties, replacing the older 20-factor test with a more streamlined analysis.

Behavioral Control Analysis

Behavioral control examines whether the business has the right to control how the worker performs their tasks. Key indicators include:

• Training requirements: Employees typically receive company training, while contractors use their methods

• Instruction specificity: Detailed instructions about when, where, and how to work suggest employee status

• Integration level: Workers whose services are integrated into regular business operations are more likely to be employees

Financial Control Factors

Financial control focuses on the business aspects of the worker's job:

• Investment in equipment: Contractors typically provide their tools and equipment

• Expense reimbursement: Employee expenses are usually reimbursed, while contractors bear their costs

• Payment method: Regular salary suggests employee status, while project-based payments indicate contractor relationships

• Profit and loss opportunity: True contractors can realize both profit and loss from their work

Relationship Type Considerations

The relationship category examines the parties' intentions and the permanency of the relationship:

• Written contracts: While not determinative, contracts stating intent can influence classification

• Employee benefits: Providing benefits like health insurance, retirement plans, or paid time off strongly suggests employee status

• Permanency: Ongoing, indefinite relationships lean toward employee classification

Key Differentiators: Employee vs. Independent Contractor

Understanding the fundamental differences between employees and independent contractors helps HR professionals make more accurate classifications:

Independent Contractor Characteristics:

• Control: Contractor controls their time and work delivery methods

• Intellectual Property: Contractor retains ownership of their work and creative output unless specifically assigned in writing

• Key Factors:

• Owns their tools; the employer does not provide equipment or workspace

• Duration and nature of the contract are project-specific or time-limited

• The intent at the time of contract formation was for an independent relationship

• Payment method is per task/project, with assumption of profit/loss risk

• Non-exclusivity and independence in work methods and client relationships

Employee Characteristics:

• Control: High employer control over work methods, schedule, and performance standards

• Benefits: Access to company benefits, workplace integration, and ongoing support

• Equipment: The Employer provides tools, workspace, and necessary resources

• Exclusivity: Typically works exclusively for one employer during business hours

Document your analysis of each factor for every worker classification decision, creating a defensible record that demonstrates your organization's good faith efforts to classify workers correctly.

Staying Compliant: Tools and Resources for HR Professionals

Professional development in worker classification remains essential as regulations continue evolving. HR professionals need ongoing education to navigate the complex intersection of federal, state, and local requirements effectively.

For comprehensive training on current classification standards, consider the Independent Contractor or Employee course, which provides practical guidance on applying both IRS and DOL tests in real-world scenarios. This course helps HR professionals develop the analytical skills needed to make defensible classification decisions while avoiding common pitfalls.

For broader professional development, the 20 PDC Recertification Bundle offers comprehensive coverage of employment law topics, including worker classification updates and compliance strategies. This package ensures HR professionals maintain current knowledge across all critical areas while meeting continuing education requirements.

Current training opportunities include a limited-time 15% discount using code JULY-25 on all continuing education courses. Additionally, HR professionals can explore the complete catalog of US HR professional development courses to stay current with evolving employment law requirements.

Moving Forward with Confidence

Worker classification in 2025 requires HR professionals to balance multiple regulatory frameworks while protecting their organizations from costly misclassification penalties. The key to success lies in developing systematic evaluation processes, staying current with regulatory changes, and investing in professional development that builds practical classification skills.

Rather than viewing classification as a one-time decision, approach it as an ongoing compliance responsibility that requires regular review and updates. How will you ensure your organization's classification practices remain defensible as enforcement priorities and regulatory standards continue to evolve?