Independent Contractor or Employee? U.S. Worker Classification in Law and in Fact

Co-funded with the W. K. Kellogg Foundation

Firms can classify workers as either employees or independent contractors and this classification has implications for the firms’ labor and regulatory compliance costs, workers’ labor protections, benefits eligibility, and tax treatment. In theory, this determination is made according to various criteria about the nature of the work being performed and about the relationship between the firm and the worker. In practice, there is substantial legal ambiguity about which classification is appropriate and enforcement has been relatively lax.

Economist Joel Slemrod and economist and legal scholar Eleanor Wilking will use micro tax data to analyze how contract work intersects with the legal boundary between employees and independent contractors. They will examine the legal criteria that distinguish employees from independent contractors, and how these criteria have evolved have over time. They will also study whether firms respond to changes in the relative price of employees by substituting independent contractors for employees and, whether this substitution represents a restructuring of production activities or a misclassification of workers.