Accurately classifying workers has never been more critical. As the gig economy grows and workforce structures become increasingly flexible, businesses must ensure they are staying on the right side of worker classification compliance. Misclassifying employees as independent contractors (or vice versa) can trigger audits, penalties, back taxes and lawsuits, none of which are easy to untangle. For companies partnering with a Managed Service Provider (MSP) like Suna Solutions, understanding the rules set by the IRS and Department of Labor (DOL) is essential to avoiding risk and protecting your business.
Why Worker Classification Compliance Matters
Worker classification determines how a business handles taxes, benefits, insurance and labor law obligations. An employee is generally entitled to benefits, overtime pay and other legal protections. Independent contractors, on the other hand, are considered self-employed and are not covered by many of the same labor laws.
According to a study by the U.S. Department of Labor, 10–30% of employers misclassify at least one worker. (DOL.gov). With such a wide margin for error, the consequences of non-compliance can quickly spiral into significant legal and financial liabilities.
At Suna Solutions, we work with clients across various industries to ensure that every worker engagement is properly classified. Whether you’re engaging 1099 contractors, W-2 employees or SOW-based consultants, ensuring proper worker classification compliance is part of our standard risk mitigation process.
IRS and DOL Guidelines: What You Need to Know
The IRS uses the “Common Law Test,” which centers around three main categories:
- Behavioral Control – Does the company control how the work is done?
- Financial Control – Are expenses reimbursed? Who provides tools? How is the worker paid?
- Relationship Type – Is the work ongoing? Are there benefits like insurance or paid time off?
The DOL recently updated its guidance and leans more heavily on an “economic reality” test, evaluating how dependent the worker is on the employer for their livelihood. The core idea is: is the worker truly operating their own business or are they functionally an employee?
For businesses operating in multiple states or partnering with government agencies, the complexity can increase. Each state can have its own worker classification standards. That’s where MSP partners like Suna help bridge the compliance gap through expert guidance, technology-enabled audits and real-time adjustments.
Red Flags That Signal Worker Misclassification
If any of the following scenarios look familiar, it may be time to reassess your workforce strategy:
- Contractors working regular hours on company systems with company-provided tools.
- Long-term contractors with no end date, functioning like internal staff.
- Contractors who report to a manager and receive daily direction.
- Independent contractors receiving benefits typically reserved for employees.
While flexibility in your workforce is a strategic advantage, it should not come at the expense of worker classification compliance. If you’re unsure whether a role should be W-2 or 1099, a third-party compliance expert, like the team at Suna, can help assess and document the correct status.
The Role of MSPs and EORs in Worker Classification
An experienced MSP or Employer of Record (EOR) can take the guesswork out of worker classification compliance. At Suna, we use proven compliance frameworks that incorporate IRS and DOL guidance, provide legal vetting and ensure transparency in how roles are structured and reported.
For clients working in industries such as healthcare, finance, logistics and tech, where contractor use is prevalent, our classification assessments reduce exposure and streamline onboarding. This becomes especially important during RFP processes or government contracting, where compliance is scrutinized and often audited.
Staying Ahead of the Curve
Worker classification compliance isn’t just a legal checkbox, it’s a key pillar of responsible workforce planning. Failing to classify workers correctly can lead to reputational damage, tax issues and long-term cost implications.
Here’s what you can do now:
- Audit your current independent contractor engagements.
- Educate hiring managers on classification rules.
- Partner with a trusted MSP that offers classification reviews.
- Keep detailed documentation and signed agreements.
- Stay updated on changes to DOL and IRS guidance.
Suna integrates worker classification compliance into our workforce management services to protect your business and help you scale with confidence.
Compliance is never accidental, it’s intentional. With regulatory bodies increasing scrutiny and legislation evolving, businesses can’t afford to wing it when it comes to worker classification. Whether you’re building a flexible workforce strategy or engaging contract talent, proper classification is the foundation.