Contractor misclassification: When doing the right thing goes wrong

A well-meaning manager once asked me to run a report: Which contractors had hit their five-year mark and qualified for the team’s PTO milestone.

It was a sweet idea. It also forced me to confront something I’d been avoiding for too long.

I had to explain that, legally, contractors don't get PTO. Which was part of the reason they weren't in our payroll system, where PTO was tracked. In fact, offering them paid time off is one of the clearest ways to prove you’ve misclassified them—exposing not just the company to risk, but the loyal contractors as well. The manager was baffled. “But they’ve been with us forever. They’re part of the team.”

That was exactly the problem.

The company had built an "inclusive" culture that didn’t distinguish between employees and contractors. Sixty percent of the workforce was contractors, many of them international. Everyone was treated the same. But not everyone was protected the same. Or paid the same. 

The systems were set up to put a fig leaf over the fact that there were two classes of team members—those with the benefits and protections of employment, and those whose compensation was devalued by not having them.

The team saw one workforce. The law saw two.

Reporting? Policy initiatives? Performance evaluations? Everything fell apart the moment we tried to draw a line—because there was already a hidden fault line running through the workforce. Well-intentioned managers kept making promises the company legally couldn’t keep. And every time there was a performance issue, we twisted ourselves into knots trying to solve it without crossing a legal line.

And that confusion didn’t just put the company at risk. Our international teammates were the ones left holding the bag—liable for taxes and penalties in their own countries, with no legal protection and no recourse. U.S. companies may be out of reach of foreign tax agencies. The contractors aren’t.

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Here are some tips for keeping a clear line between contractors and employees:

📄 Use contracts that define scope, response times, and deliverables clearly—and revisit them regularly.

🙈 Avoid giving contractors access to more than they need. Limit permissions to what’s essential for the project.

💞 Keep contractors out of employee-only systems—no PTO, no bonuses, no performance reviews.

⏰ Let contractors set their own schedules and methods—if they’re reporting to you like a full-time employee, it's probably time to adjust.

💬 Check in quarterly to make sure the work and relationship still align with contractor status—especially if the role has expanded over time.

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Good intentions don’t protect anyone from misclassification. Clean structures do.

If your team can't tell the difference between who's a contractor and who's an employee—or you've lost track of it yourself—it's time to check in. 

Need a gut check? We'd love to help.

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