With remote work now the norm and talent scattered across borders, the line between contractors and employees has become blurrier than ever. The old rules of thumb (like working in the office = employee, working remotely = contractor) no longer apply.

This is exactly where companies stumble into dangerous territory. They misclassify workers in subtle but critical ways:

• Treating contractors like employees by controlling their work hours, methods, and processes
• Having contractors handle core business functions indefinitely rather than for specific projects
• Providing equipment, software licenses, and company email addresses to contractors

As cash-strapped tech companies increasingly lean on contractor relationships to stay lean, regulatory bodies are ramping up enforcement. They know exactly where to look, especially in startup, agency, and tech hubs where contractor relationships are common.

But don't panic and don't start converting everyone to full-time just yet. In this guide, I'll walk you through the practical steps to correctly classify your workers and protect your business—without losing the flexibility that helps you move fast.

What is worker misclassification?

Worker misclassification happens when you label someone as a contractor when they're actually functioning as an employee in the eyes of the law—or vice versa.

Just because someone:

• Works remotely
• Wants to be a contractor
• Sends you invoices
• Has their own LLC
• Signs a contractor agreement

...doesn't automatically make them a legitimate contractor.

The government looks at the actual nature of the working relationship, not the paperwork or titles you use.

Who is a contractor?

Strip away the legal jargon, and an independent contractor is essentially running their own business—even if that business is just themselves. Here's what this really means:

Control & Independence

A true contractor decides 'how' to do the work. You can set deadlines and quality standards, but you can't dictate their work hours, tools, or methods. Think of hiring a plumber: you care about the fixed pipe, not whether they used Brand X or Brand Y tools to fix it.

Project or Scope-Based Work

Contractors typically work on defined projects or deliverables. While relationships can be long-term, the work should be structured around specific outcomes rather than ongoing operational roles. A contractor might build your app's payment system, but probably shouldn't be your permanent, full-time lead developer.

Business Relationship

Real contractors:

• Have multiple clients (or at least the freedom to have them)
• Cover their own business expenses
• Set their own rates
• Can make a profit or loss from how they manage their work
• Carry their own insurance when needed
• Use their own tools and equipment

Core vs. Supplementary Work

While contractors can be crucial to your business, they typically shouldn't handle the permanent, day-to-day functions that define your company. They're supporting players, not the main cast.

If you're reading this and realizing some of your 'contractors' don't fit these criteria, don't panic—but do take action. At Thera, we help startups and agencies navigate these murky waters daily.

Book a 30-minute consultation with our experts to:

• Get a quick assessment of your current contractor relationships
• Understand your specific risk areas
• Learn practical steps to protect your business
• Explore compliant alternatives for flexible hiring

Why wait for an audit? Schedule your free consultation today.

5 Critical Steps to Mitigate Worker Misclassification Risk

1— Audit Your Current Relationships

Don't wait for regulators to find issues—spot them yourself first. Review every contractor relationship against the IRS and DOL criteria. Look closely at long-term contractors, those working full-time hours, and anyone handling core business functions.

Document how each contractor operates independently, their other clients, and how they control their work. Red flags include contractors who only work for you, follow your schedule, or take detailed direction from your team. This audit isn't a one-time task—make it a quarterly practice as contractor relationships often evolve over time.

2— Create Clear Contractor Agreements

Your contractor agreement isn't just paperwork—it's your first line of defense. Beyond basic terms, clearly spell out the contractor's independence: their right to set hours, ability to work with other clients, and control over their work methods.

Specify project deliverables rather than ongoing duties. Include clear language about their business relationship, responsibility for expenses, and tax obligations. But remember: a solid agreement alone won't protect you if the actual working relationship doesn't match what's on paper. Update agreements as project scopes change.

👉 Download our contractor agreement template here.  Just fill in your company details, project scope, and payment terms. Our template includes built-in protections for contractor status and some necessary legal clauses. 3— Implement Distinct Policies for Contractors

Treat contractors differently from employees in your daily operations.

✅ Create separate onboarding processes, communication channels, and project management approaches.

❌ Don't require contractors to attend employee meetings, training sessions, or team-building events.

❌ Avoid providing company equipment or email addresses unless absolutely necessary.

✅ Maintain clear boundaries—don't include contractors in employee-specific policies, benefits discussions, or performance reviews.

Document these distinctions in your operational procedures to show a clear separation.

4— Structure Project-Based Relationships

Move away from open-ended contractor arrangements. Instead, structure relationships around specific projects, deliverables, or defined scopes of work. Set clear milestones and delivery dates rather than ongoing responsibilities. Allow contractors to determine how they'll achieve these outcomes—focus on results, not methods.

If you need someone for a permanent, ongoing role, that's usually a sign you need an employee, not a contractor. Regular review and renewal of project scopes help maintain appropriate contractor relationships.

5— Document Independence and Control

Maintain records showing how contractors operate as independent businesses. Keep evidence of their other clients (where appropriate), their business licenses, insurance certificates, and tax documentation. Document instances where contractors make independent decisions about their work methods, schedules, and resources.

For example, for a contractor

• Saves emails where they declined work due to other client commitments
• If they reject work, propose alternative approaches, or negotiate terms, record it.
• Keeps records of their professional liability insurance
• Maintains copies of their LLC documentation → This builds evidence of true independence.

These records prove contractors truly operate independently—crucial evidence if your classifications are questioned. Regular check-ins to verify continued independence can help catch relationship drift.

Protect Your Business with Thera

Built for US-based startups and agencies, Thera simplifies global hiring and payroll so you can focus on growth. Manage your entire team—contractors, employees, and freelancers—all in one place, with:

• Same-day payouts worldwide
• Better exchange rates (up to 3% more take-home pay)
• Dedicated Slack support channel
• 50% lower fees than competitors
• Full compliance across 150+ countries

Join companies like Hypergen and Zendrop who trust Thera to handle their global workforce. Start saving time and money today while keeping your team happy.

Book a personalized demo today.