Independent Contractor vs. Employee: Legal Tests Explained

 Posted on July 11, 2025 in Employment Law

An analysis by the National Employment Law Project focused on state-level reports regarding the misclassification of employees as independent contractors. It was estimated that between 10 and 30 percent of employers misclassify workers, although the Department of Labor found that the number was closer to the high end of 30 percent.

Misclassifying workers as independent contractors rather than employees can lead to serious legal and financial consequences under Maryland law. For the misclassified employee, an employment law advocate can help resolve the issues. The state of Maryland uses a combination of federal and state tests to determine whether a worker should be classified as an employee or an independent contractor.

These decisions create a ripple effect of adverse consequences when they are made in error. If you feel your employer has misclassified you as an independent contractor, robbing you of employee benefits, it could be beneficial to speak to a knowledgeable Bethesda, MD employment law attorney.  

How Misclassification Hurts Employees

When a worker is misclassified as an independent contractor, they are no longer eligible to receive overtime pay or minimum wage, and they cannot participate in the unemployment insurance system or qualify for workers’ compensation.  Misclassification as an independent contractor prevents workers from taking advantage of paid sick leave or family leave, and they are denied employer-provided health insurance and retirement benefits.

Misclassified employees are not protected by the National Labor Relations Act, which grants employees the right to form unions and collectively bargain to improve their working conditions. When workers are misclassified as independent contractors, the full financial cost of Social Security and Medicare contributions falls on their shoulders rather than being shared with the employer. Finally, workers misclassified as independent contractors have no protections regarding discrimination or sexual harassment.

Federal and State Legal Approaches

The IRS Test is used by many states and asks the following questions to determine whether a worker is an employee or an independent contractor:

• Is the worker required to follow instructions regarding where and how work is done? (No for independent contractors)
• Did the worker receive initial and continuous training from the employer? (Independent contractors are not trained by employers.)
• Can the worker contract out parts of the job? (No, for employees)
• Can the worker hire his or her own assistants? (No, for employees)
• Is there a continuing relationship? (Generally no, for independent contractors)
• Does the business set the worker's hours? (No for independent contractors)
• Must the worker work full time? (No for independent contractors)
• Is the work always done on the premises? (Generally no, for independent contractors)
• Does the business dictate the sequence of work? (No, for independent contractors)
• Are oral or written reports required? (No, for independent contractors)
• Is the worker paid by the hour, week, or month? (Yes, for employees)
• Is the worker paid for expenses? (Yes, for employees)
• Are tools and materials furnished? (Yes, for employees)
• Can the worker make a profit or suffer a loss from the work? (No, for employees)
• Does the worker work for more than one business at a time? (Yes, for independent contractors)
• Are the worker’s services available to the public? (Yes, for independent contractors)
• Can the business fire the worker? (Yes, for employees)

The state of Maryland distinguishes between employees and independent contractors based on the extent of control the employer has over the work performed. The state presumes workers are employees, placing the burden on the employer to prove otherwise. Under the Maryland Recovery of Benefits and Penalties for Fraud Act of 2016, employers can incur penalties of up to $5,000 per misclassified employee, and up to $20,000 for those who knowingly advise employers to misclassify workers.

Contact a Montgomery County, MD Employment Lawyer

If you are a worker unsure of your classification, getting legal clarity is essential. A Silver Spring, MD employment law attorney from Freedman Law, LLC can assess your situation and help ensure your rights are protected. Attorney Freedman represents clients in federal and state courts and is rated as one of the best employment lawyers in Annapolis, MD. Call 410-290-6232 to schedule a consultation with an attorney.