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For international founders hiring their first U.S. workers, one of the earliest decisions often looks deceptively simple: contractor or employee
In practice, it’s one of the easiest ways to create compliance risk without realizing it.
Many early-stage companies assume that if someone signs a contractor agreement and sends invoices, the classification is settled. But in the U.S., worker classification isn’t determined by the label on the contract — it’s determined by how the relationship actually functions day to day.
If a “contractor” works set hours, follows internal processes, and operates like part of your team, regulators may view that role as employment regardless of what the paperwork says.
For global founders building U.S. teams, this distinction affects taxes, wage laws, benefits eligibility, and state-level compliance requirements. Misclassification rarely happens because of one obvious mistake — it usually emerges from a pattern of control, dependency, and ongoing work that slowly starts to look like employment.
Here’s how U.S. worker classification actually works, and how founders can determine the right structure before small decisions turn into bigger compliance problems.
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How worker classification works in the U.S.
There isn’t one universal test that tells you whether someone should be a contractor or an employee. Different agencies and laws can apply different standards. Moreover, the same role can be evaluated through multiple lenses. Federal taxes, wage-and-hour rules, and state laws each impact how roles can be structured.
Agreements between workers and employers matter, but enforcement bodies typically look past titles and examine what’s happening in practice.
The main U.S. frameworks you’ll hear about
1) IRS (federal tax): employee vs. independent contractor
For federal tax purposes, the IRS focuses on whether the business has the right to direct and control the worker. The IRS organizes its approach into three broad categories:
Behavioral control: Instructions, training, and how the work is done.
Financial control: Expenses, investment, opportunity for profit/loss, method of payment.
Type of relationship: Written contracts, benefits, permanency, and whether the work performed is a key aspect of the business.
Misclassifying workers can impact a company’s tax burden and government oversight.
2) U.S. Department of Labor: economic reality under the FLSA
For wage-and-hour compliance under the Fair Labor Standards Act (FLSA), classification is generally assessed by determining whether the worker is economically dependent on the business (more like an employee) or whether a given role is one of numerous revenue streams for an employee (more like an independent contractor). In practice, this is typically handled as a multi-factor analysis.
Independent contractors are typically responsible for invoicing an employer directly as well as covering all associated taxes, all without much of the oversight typically associated with a role. Conversely, employees commonly receive direct training, supervision, and protections under labor laws.
3) State rules are stricter: California’s ABC framework
Some states apply stricter standards for certain claims and contexts. California is frequently cited because its approach can be more restrictive in many situations and often starts from a presumption of employee status, subject to statutory exemptions and specific fact patterns.
As of 2025, many states have also reinforced employment classification by instituting pay transparency requirements and rules regarding paid leave, all of which further complicate worker designation.
You can’t assume a classification decision that feels reasonable under one framework (or in one state) will hold everywhere.
A decision framework that founders can actually use
The cleanest way to avoid trouble is to decide based on the working relationship you truly need, then structure and manage it accordingly.
Contractor relationships tend to fit when:
The work is project-based with a defined scope and deliverables.
You’re buying an outcome, not supervising the method. That is, you care about “what,” not “how.”
The worker can maintain independence, often including their own tools/workflow and the ability to serve other clients.
The services are not a permanently embedded role on your team.
Employee relationships tend to fit when:
The role is ongoing and functions as part of your operating team.
You need to set schedules, processes, tools, or methods, not just accept an assigned deliverable.
The person is integral to day-to-day operations, and you’re managing performance like an internal role.
The relationship looks like continuing work rather than a bounded engagement.
A useful internal rule-of-thumb: if you’re building an org chart role, you’re usually in employee territory. If you’re buying a discrete service with start and finish dates, a contractor definition may be viable, subject to the applicable tests and local rules.
What compliance issues misclassification can trigger
Misclassification can create exposure across multiple categories at once:
Federal tax exposure
If a worker who should have been treated as an employee is treated as a contractor, the business may face issues related to employment taxes and withholding. The IRS frames this as a worker classification problem that affects tax responsibilities.
Wage-and-hour and benefits exposure
If a worker is effectively an employee under the relevant standard, the business may face claims tied to wage-and-hour rules. This can include overtime, depending on role and exemption status, along with other statutory entitlements that attach to employment status.
State-level exposure
States can layer on their own enforcement approaches, tests, and remedies. If you have U.S. workers in more than one state, treat classification as a state-by-state question vs. a single determination.
Questions to ask as part of your worker classification check
Use these questions as a litmus test when determining worker classification:
Control and day-to-day direction
Are you directing when and how the work must be performed?
Are you providing tools, equipment, or workspace as a standard requirement?
Are you training the person in your internal process (not just onboarding to a project outcome)?
More “yes” answers here usually point toward employee-like control and liability.
Financial independence and business-like risk
Does the worker have a meaningful opportunity for profit or loss based on how they complete the work?
Do they have their own business investment (tools, software, staff, insurance, marketing)?
Do they work with multiple clients as a matter of practice?
More “yes” answers here tend to look more contractor-like, depending on the full scope of work as well as state regulation.
Relationship shape
Is the relationship indefinite rather than time-bound?
Is the work a core, ongoing part of your company’s output?
Are you expecting exclusivity in practice?
More “yes” answers here generally mirror definitions of employment.
Common patterns that create avoidable risk
1) Labeling someone a contractor but managing them like an employee
The contractor title won’t do much for you if you’re otherwise treating someone as a traditional employee, with all of the oversight and management that might entail.
2) Treating “remote” as a classification shortcut
Remote is a work location, not a legal category. The underlying control, financial independence, and relationship facts still matter. Common law rules apply, regardless of location or modality.
3) Using long-running contractors for what is effectively a permanent internal role
The longer and more embedded the relationship becomes, the harder it is to defend “independent” status, especially if the worker is performing core work under company direction.
If the person should be an employee, but you don’t have a local entity
International founders often encounter a second question after classification: “If we need an employee relationship, how do we employ someone compliantly in a place where we don’t have an entity?”
Operationally, that’s a separate structuring decision from classification. Typical options include:
Forming a local entity: This typically requires more setup and ongoing administration.
Using an Employer of Record (EOR): A third party hires the worker through its local entity and handles payroll/withholding/benefits administration while you manage the day-to-day work.
Important boundary: An EOR can simplify employment administration and local setup, but it does not automatically erase classification risk in every situation; the facts of the working relationship and the relevant laws still matter.
What to do next to check your worker classification accuracy
Map your current “contractors” against reality. Document what you control, the length of the relationship, and whether the work is core or project-based.
Check the applicable framework(s). Start with IRS guidance for federal tax framing, then assess wage-and-hour and the state(s) involved.
Fix the highest-risk relationships first. In practice, the highest-risk cases are usually long-running, full-time, manager-directed roles labeled as contractors.
Build a repeatable intake process. Before engaging any new worker, conduct a consistent classification review and store the rationale.
Plane also provides a worker classification tool to help teams document and assess contractor vs. employee factors consistently.
Legal disclaimer: The information provided is for informational purposes only and should not be considered legal advice.
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