As an employer, it is your duty to classify people who work for you correctly. The two primary classifications are employees and independent contractors. Your business can suffer greatly if you don't place workers in the correct category. One of the reasons for this is that misclassification is illegal.
Some employers opt to try to classify all workers as independent contractors because they think that it will save them employment costs. While this is true to an extent, it can be much costlier if you are caught.
Employers don't have to pay for workers' compensation insurance, unemployment insurance, and taxes for independent contractors but they do have to cover these costs for employees. The independent contractors also don't have the same protections from wage and hour laws and other labor laws.
When you are trying to determine how to classify a person who works for your company, one of the most important things you have to consider is how much control you have over when, where and how the employee will work. The more control you have, the more likely it is that the person is an employee and not an independent contractor.
In many cases, misclassification isn't noticed until a worker tries to get specific benefits or notices that they got a 1099 tax form instead of a W2 from your company. Unfortunately, this realization might be the starting point for an employment dispute that can be time-consuming and costly. You should learn what options you have for addressing the allegations of misclassification because the penalties that you face might be strict and harsh.