How to Legally Onboard Independent Contractors Without Risking Misclassification

December 2024

Hiring independent contractors can be a smart, flexible way for small businesses and startups to grow. But calling someone a contractor doesn’t make it so, and the consequences of misclassification can be costly. Tax liability, back pay, and legal claims can all arise if the contractor is actually functioning like an employee in the eyes of the law. At Moeller Law PLLC, we help businesses set up contractor relationships the right way. As outsourced general counsel, we don’t just write the agreement, we make sure the structure, working relationship, and documentation all align with legal standards — and we coordinate with your payroll provider, accountant, or HR consultant when needed.

What the Law Actually Looks At

Courts and regulators won’t rely on your contract or tax forms to decide whether someone is a contractor. They’ll look at how the relationship functions in reality. One of the biggest factors is control. If your business is directing when, where, and how the work is performed, that tends to look more like an employment relationship.

Another consideration is whether the worker is economically independent. If they work for other clients, use their own equipment, and operate with autonomy, they are more likely to be classified as a true contractor. But if they’re integrated into your team and contributing to the core operations of your business on a long-term basis, there’s a strong argument that they should be treated as an employee.

Where Businesses Get It Wrong

Many businesses assume that as long as the worker agrees to be classified as a contractor, they’re in the clear. Unfortunately, that’s not the case. The IRS and Department of Labor — and often state agencies as well — apply their own independent tests. A contractor agreement is helpful, but not determinative. Issues often arise when businesses hire someone as a contractor, then assign regular work hours, provide equipment or a workspace, and expect the contractor to function as part of the team. That setup may feel normal in a startup environment, but it undercuts the legal independence that defines a contractor relationship.

What to Do Instead

To reduce risk, the relationship should be structured (and documented!) correctly from the start. This includes using a written agreement that clearly defines the scope of the project, states that the worker is not an employee, and outlines how compensation, taxes, tools, and termination will work. It’s also critical to include provisions covering ownership of work product and protection of business information.

Beyond the contract, the working relationship should reflect that independence. Let the contractor control how they complete the work, avoid assigning day-to-day supervision, and treat the role as project-based rather than permanent. When there’s any uncertainty, we recommend conducting a legal classification review before onboarding. At Moeller Law PLLC, we walk through the relevant factors and provide a clear recommendation based on federal and state standards.

Our Role as Outsourced General Counsel

We partner with growing businesses to manage legal needs like contractor onboarding without the cost of a full-time legal department. That includes reviewing roles for proper classification, preparing contractor agreements tailored to your industry, and ensuring your onboarding process supports legal compliance. When needed, we coordinate with your tax and HR professionals to make sure the business is protected from all angles. While we can support on a project or hourly basis, our clients often find the most value when we’re involved on a consistent, fractional basis. That allows us to spot risks early, support growth strategically, and help build systems that scale.

Independent contractors are a great tool for growing your business, but they require careful planning. Misclassification is one of the most common legal pitfalls for small businesses — and one of the most preventable. Moeller Law PLLC provides practical, business-focused legal support to help you grow confidently, without stepping into compliance traps. If you’re onboarding contractors or need to revisit your existing structure, we’re here to help.

Let’s talk about building a compliant, flexible workforce for your business.