## The Real Cost of Getting It Wrong Misclassifying employees as independent contractors is not a gray-area shortcut; it is a compliance liability that compounds over time. In 2024, a federal district court in California entered a $25 million settlement against Grubhub for misclassifying delivery drivers, and in 2019 New Jersey hit Uber with a $640 million tax bill for the same practice. These are not isolated incidents. The Economic Policy Institute has estimated that worker misclassification costs the federal government roughly $3.5 billion annually in unpaid payroll taxes alone, and that figure does not include state-level unemployment insurance shortfalls or workers' compensation gaps. For a structural engineering firm or any construction-related business, the stakes are even higher because project-based work, joint ventures, and subcontractor chains create multiple layers of exposure. When a company treats a worker who is functionally an employee as a contractor, it avoids withholding income tax, paying the employer share of Social Security and Medicare, and providing workers' compensation coverage. The DOL's proposed 2026 independent contractor rule tightens the lens further, making it harder for businesses to justify classification outside the standard employment relationship. The rule emphasizes the degree of control the hiring entity exercises and the worker's opportunity for profit or loss, which directly challenges the common practice of labeling salaried project engineers as contractors simply because they receive a 1099 instead of a W-2.
## Why Misclassification Happens in Engineering and Construction The structural engineering industry has a structural reason for misclassification: project-based workflows. Firms routinely bring in specialists for bridge inspections, seismic evaluations, or forensic analyses, and the natural instinct is to classify those specialists as independent contractors to avoid the administrative burden of payroll taxes and benefits. The NFIB has published tips on independent contractor classification that warn employers against relying on job titles or the form of payment alone. A structural engineer who works exclusively for one firm for three years, uses the firm's software and office space, and follows the firm's quality-control protocols is not an independent contractor regardless of what the engagement letter says. The Dynamex Operations West, Inc. v. Superior Court decision in California introduced the ABC test, which presumes a worker is an employee unless the hiring entity can prove the worker is free from control, performs work outside the usual course of the hiring entity's business, and is engaged in an independently established trade. For a structural engineering firm, a designer performing drafting and analysis services is squarely within the usual course of the business, which makes the ABC test particularly unforgiving. The Ontario Labour Relations Board's ruling against Foodora, finding that couriers were misclassified and therefore denied the right to unionize, illustrates how courts and labor boards are increasingly looking past contractual labels to the economic reality of the working relationship.
Also worth reading: What is the difference between W-9 and 1099 for independent contractors in 2026? · What are independent contractor payment delays and how can I avoid them? · Can a company withhold pay from independent contractor if the work is delayed?
## The Federal and State Regulatory Landscape in 2026 The regulatory environment for worker classification has become a patchwork of overlapping standards, and 2026 is shaping up to be a year of heightened enforcement. The DOL's proposed 2026 rule, which was previewed in early 2026, would replace the Trump-era economic realities test with a stricter framework that weighs the degree of control and the opportunity for profit or loss more heavily. This rule is not yet finalized, but the fact that it is moving through the rulemaking process signals that the federal government intends to close loopholes that have allowed companies to classify workers as contractors for years. At the state level, the divergence is even starker. New Jersey adopted independent contractor rules that have been criticized by freelancers and gig workers for being too permissive in some respects and too complex in others, creating confusion for businesses that operate across state lines. Kentucky is considering a billionaire-inspired bill that would separate workers from certain employment rights, which could further complicate classification for firms with projects in multiple states. For a structural engineering firm, the practical implication is that a worker classified as a contractor in one state may be deemed an employee under the laws of another state where the same work is performed. Executive Order 2026-01, issued by the Arizona governor, adds another layer by directing state agencies to scrutinize worker classification in industries with high rates of misclassification, which includes construction and engineering services.
## Practical Steps to Ensure Correct Classification The most effective way to avoid misclassification is to conduct a systematic review of every worker relationship against the specific tests used in the jurisdictions where the work is performed. Start by documenting the degree of control the firm exercises over the worker. If the firm sets the hours, requires attendance at meetings, provides tools and equipment, or dictates the method by which the work is completed, those are strong indicators of an employment relationship. Next, examine the worker's opportunity for profit or loss. An independent contractor typically bears the financial risk of the project, can work for multiple clients simultaneously, and can realize a profit or loss based on their own business decisions. A structural engineer who receives a flat fee per project but has no ability to take on additional clients, uses the firm's proprietary software, and is subject to the firm's quality review process is not bearing the financial risk of the enterprise. The NFIB's classification tips emphasize that the permanency of the relationship matters, as does whether the worker has a distinct business, such as a registered LLC, a separate office, and their own insurance. Firms should also review their contracts to ensure that the written agreement reflects the actual working relationship, not just the desired classification. A contract that calls a worker an independent contractor but imposes controls inconsistent with that label will not protect the firm in an audit or lawsuit.
## Comparison Table: Employee vs. Independent Contractor Standards
| Feature | Employee (W-2) | Independent Contractor (1099) |
|---|---|---|
| Control over work methods | Employer directs how work is done | Worker controls methods and schedule |
| Tools and equipment | Provided by employer | Provided by worker |
| Opportunity for profit or loss | Fixed salary or hourly wage | Worker bears financial risk |
| Benefits eligibility | Eligible for health, retirement, workers' comp | Not eligible for employer-provided benefits |
| Tax withholding | Employer withholds income tax, pays FICA | Worker responsible for self-employment tax |
| Termination | Subject to unemployment and wrongful termination laws | Terminated per contract terms, no unemployment claim |
| Multi-client restriction | Typically exclusive | Can work for multiple clients |
## When to Act and How to Conduct a Classification Audit The best time to conduct a classification audit is before a government agency or a disgruntled worker initiates one. Firms should schedule a review at least annually, and any time a significant change occurs in the nature of a worker's engagement, such as a shift from project-based to ongoing work or the addition of new control mechanisms. The audit should begin with a review of the actual working conditions, not the contracts. Ask whether the worker sets their own hours, whether they can decline work, whether they have other clients, and whether they have invested in their own business infrastructure. Compare the answers against the specific test used in the relevant jurisdiction. If the audit reveals that a worker has been misclassified, the firm should take immediate steps to correct the classification, reclassify the worker, and consult with employment counsel to assess potential liability for back taxes, benefits, and unpaid wages. The DOL's proposed 2026 rule adds urgency to this process because the final rule, once implemented, may expand the categories of workers who are presumed to be employees. Firms that proactively correct misclassifications before a rule change takes effect reduce their exposure and demonstrate good-faith compliance efforts.
## Cost and Pricing Considerations for Compliance The cost of getting classification wrong far exceeds the cost of getting it right. Back-pay liabilities for misclassified workers can include unpaid overtime, minimum wage differentials, benefits that should have been provided, and employer shares of payroll taxes. In the Grubhub case, the $25 million settlement covered damages to thousands of drivers. For a smaller structural engineering firm, a single misclassification audit could result in tens or hundreds of thousands of dollars in liability, plus penalties and interest. On the compliance side, the cost of a classification audit is relatively modest compared to the potential exposure. Firms can conduct internal reviews using the DOL's economic realities factors and the ABC test factors at no direct cost, though they should budget for legal counsel to review the findings and advise on remediation. The Jackson Lewis analysis of the DOL's proposed 2026 rule notes that employers should begin preparing now by documenting the factors that support their classification decisions, even if the final rule is not yet in effect. Investing in classification compliance is not an expense; it is a risk management strategy that protects the firm's financial health and its reputation in an industry where trust and reliability are essential for securing repeat business and referrals.