city skyline

2022 Independent Contractor Red Flag Checklist

by MLMW

While individual items in this checklist below are not definitive, if any item is checked it should serve as a red flag that a company needs to evaluate whether it has properly classified a worker as an independent contractor.

There are many important considerations when determining whether an individual who performs services for a company is an employee or an independent contractor. These considerations are highly dependent upon common law and statutory distinctions that vary by both state and context. Generally speaking, it is important when determining whether an individual may be properly classified as an independent contractor to assess the company’s right to control the manner and method in which the individual’s work is performed and to determine whether, in terms of the economic realities, the individual appears to be an employee of or independent contractor with the company. These two aspects of the relationship appear across many of the state-level, independent contractor standards and are important to assess at the beginning of any relationship that the company intends to classify as independent contractor.

Review Factors and Red Flags

The following is a list of factors often considered in evaluating whether an individual is an independent contractor or an employee and “red flags” that may tend to indicate an employee relationship.

___ (1) Instructions from Company.

Red Flag: The Company gives instructions to the individual regarding completion of the job and/or requires the individual to follow certain instructions. (Note: instructions can be distinguished from job specifications).

___ (2) Company-provided training.

Red Flag: The individual receives training from the Company and/or follows the Company’s methods to accomplish the work.

___ (3) Individual’s ability to sub-contract work.

Red Flag: The individual is being hired to provide a result and does not have the right to require others to do the actual work.

___ (4) Impact of the work on the Company’s success.

Red Flag: The Company’s success or continuation is, at least, partially dependent upon the services of the individual.

___ (5) Control of work hours.

Red Flag: The Company sets the individual’s hours or sets parameters for when work must be completed (such as during business hours).

___ (6) Frequency/regularity of relationship between individual and Company.

Red Flag: The contractor has a continuing relationship with the Company— even if not full-time—at frequent or regular intervals, or whenever work is available. WARNING: Part-time, seasonal or short duration relationships are irrelevant to independent contractor status.

___ (7) Individual’s right to hire and supervise assistants.

Red Flag: The individual cannot hire assistants without the Company’s approval, or the individual is reimbursed for whatever he or she pays to those assistants.

___ (8) Individual’s time to pursue other work.

Red Flag: The individual does not have time to pursue other gainful work.

___ (9) Determination of job location.

Red Flag: The Company controls where the individual works; or where the individual works on the Company premises, if the Company directs or supervises the individual.

___ (10) Determination of order/sequence of work.

Red Flag:  The Company determines the order or sequence in which the individual performs the work.

___ (11) Interim reporting.

Red Flag: The Company requires the individual to provide progress or interim reports.

___ (12) Basis of payment.

Red Flag: The individual is solely paid by the hour for time actually worked rather than by the job.

___ (13) Number of firms for which the individual works.

Red Flag:  The individual does not work for more than one firm at a time.

___ (14) Payment of business expenses.

Red Flag: The Company reimburses the individual for his or her incidental expenses.

___ (15) Ownership of tools/equipment.

Red Flag: The Company furnishes the individual with tools and equipment needed to perform services. Or, where the Company leases equipment to the individual, the lease terms are more favorable than what an independent business person could have obtained in the open market.

___ (16) Extent of the individual’s investment in his or her trade.

Red Flag: The individual cannot perform his or her services without the Company’s facilities (equipment, office furniture, machinery, etc.) or if the individual’s investment in his or her trade is minimal.

___ (17) Availability of the individual’s services to general public.

Red Flag: The individual does not make his or her services available to the general public. Factors include (check one or more):

___ Does not have an office and assistant(s).

___ Does not have business signs.

___ Does not have a business license.

___ Does not list his or her services in a business directory.

___ Does not advertise his or her services.

___ (18) Individual’s entrepreneurial profit or loss from the services provided.

Red Flag: The individual cannot make a profit/ suffer a loss from his or her services and own managerial skills. Factors include (check one or more):

___ The individual does not hire, direct or pay assistants.

___ The individual does not have his or her own office, equipment, materials or facilities.

___ The individual does not have continuing or recurring liabilities.

___ The individual has not agreed to perform specific jobs or to perform the jobs at prices agreed upon in advance.

___ The individual’s services do not affect his or her own business reputation.

___ (19) Company’s right to terminate.

Red Flag: The individual can be fired at any time (i.e., at will) without consequences to the Company.

___ (20) Individual’s liability for non-completion of the job.

Red Flag: The individual is not responsible for the satisfactory completion of the job and is not legally obligated to compensate the Company for his or her failure to complete it.

___ (21) Individual’s special skill.

Red Flag: The individual does not possess any special skill that is required to complete the job requested by the Company.

___ (22) Understanding of the relationship.

Red Flag: The individual has not been made aware of or acknowledged in writing that he or she is an independent contractor and not an employee of the Company; or the Company does not have a contract with the individual to complete a specific job or that indicates independent contractor status.

___ (23) Company’s direction or supervision.

Red Flag: The job being performed by the individual is one that is usually done under the direction or supervision of the Company.

Conclusions from Evaluating the Above Factors

  • Strengths (i.e., Areas that support independent contractor status – not checked as red flags)

○ [list strengths]

  • Weaknesses (i.e., Areas that support employee status – areas checked as red flags)

○ [list weaknesses]

If you have any questions about the above checklist, contact our office. 

For further information on independent contractor and employee classification, see Independent Contractor Tests and Risks of Worker Misclassification and Independent Contractor and Employee Classification: Special Tax Issues. For guidance on independent contractor agreements, see Independent Contractor Agreements: Major Negotiation, Drafting, and Legal Issues.

For information on state laws concerning independent contractors, see Independent Contractors State Practice Notes Chart. For an annotated independent contractor agreement, see Independent Contractor Agreement (Pro-service Recipient). For state-specific annotated independent contractor agreements, see the Independent Contractors and Interns column of Wage and Hour State Expert Forms Chart.

mlmw_mark_MD_Transparent.jpgMLMW is a business, real estate, finance, and litigation law firm. Craig T. Watrous and Reed Morris are Colorado M&A attorneys and partners at MLMW, based in Denver, Colorado. Craig and Reed regularly represents businesses. Craig can be reached at cwatrous@mlmw-law.com and (303) 722-2165. Reed can be reached at rmorris@mlmw-law and (303) 927-0011