Contingent Workers in the U.S.: The Employer’s Guide to Compliance

Updated on: May 19, 2025

Key takeaways:

• Contingent labor is now a strategic workforce model, offering flexibility and speed while requiring careful compliance with evolving labor laws.
• Understanding worker types and classifications, from freelancers to temps, is essential to avoid misclassification risks and legal penalties.
• Federal, state, and local regulations are tightening, making proper documentation, contracts, and tax reporting critical for compliance.
• Contingent workers have defined rights, and companies must ensure safety, fair treatment, and awareness of regional protections like paid leave.
• Partnering with experts like IES simplifies compliance, offering EOR and AOR services that handle onboarding, payroll, and classification at scale.

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What is Contingent Labor? Understanding the Modern Workforce Model

Contingent workers play critical roles in today’s hybrid workforce, helping companies adapt to evolving needs and tap into specialized talent. Notably, 48% of organizations surveyed by HR.com are using contingent workers to improve business agility and flexibility, while 43% are using them to enhance the skill level of their workforce. These numbers reflect a shift from viewing contingent labor as merely tactical to genuinely strategic.

Contingent labor includes a wide range of nonpermanent workers that companies engage to meet specific needs without adding permanent headcount. Common types of contingent workers include:

Independent contractors (ICs)

ICs typically perform specific services under a contract but work independently, not as employees. Companies bring in ICs when they need skilled talent for a specific timeframe or project, but not on a permanent basis.

Use case: A tech company hires a contractor to build a specific module of a web application over six months.

Freelancers

Freelancers offer creative or professional services to clients on a project basis. Freelancers are often used for content creation, design, or media projects that don’t require full-time staff.

Use case: A startup launches a new product and hires freelance writers and designers to create launch content for three months.

Consultants

Consultants provide expert advice in a specific field. Companies use consultants for high-level, strategic input, especially during transitions or transformations.

Use case: A company going through a merger contracts a consultant to guide integration of HR systems.

Temporary workers (temps)

Temps are hired for short-term assignments, often through an agency. Temps fill short-term or seasonal roles, such as seasonal warehouse workers or data entry clerks, often via staffing agencies. They are frequently used to cover absences or manage workload spikes.

Use case: An e-commerce retailer brings in temps to handle holiday order fulfillment from October to January.

Gig workers

Gig workers are tapped for one-off or flexible assignments, often via platforms or apps. They are the task runners, delivery couriers, or on-demand customer service agents.

Use case: A company uses a gig platform to hire remote workers to handle customer support overflow during a product launch.

Contingent Worker vs. Contractor: What’s the Difference?

Although people often use “contingent worker” and “contractor” interchangeably, they aren’t the same.

Category	Contingent Worker	Independent Contractor
Definition	Broad term covering all nonpermanent workers	Specific type of contingent worker, typically paid as a 1099
Engagement Type	Includes freelancers, temps, gig workers, and contractors	Contract-based, self-employed individuals
Payroll Classification	Can be W-2 (via staffing agency) or 1099	1099
Compliance Requirements	Varies by type and jurisdiction	Subject to IRS and DOL rules for contractors

Clarifying the contingent worker vs. contractor distinction is essential for tailoring engagement terms, setting clear expectations, and maintaining compliance.

Contingent Workforce Compliance: Avoiding Legal and Financial Risks

Managing a contingent workforce comes with a range of compliance risks, and overlooking misclassification and co-employment requirements can result in fines of up to $25,000 per violation and up to one year of imprisonment. Here’s what employers need to know:

1. Contingent Worker Classification

Correctly classifying workers is foundational to compliance. W-2 employees are on the company’s  payroll, with taxes withheld, benefits often provided, and employer control over work details. On the other hand, 1099 independent contractors operate as self-employed individuals, controlling how and when they work and handling their own taxes.

Misclassifying independent contractors as employees can lead to severe fines, tax liabilities, reputational damage, and even class-action lawsuits in addition to thousands of dollars in penalties covering back pay, unpaid benefits, and tax liabilities. So, before engaging a worker, make sure to assess:

• The nature of the work.
• The degree of independence that comes with the role.
• The level of control over tasks.
• The level of integration in operations.
• The employees who are doing the same work, if any.
• The importance of the work to your business.
• The permanence of the relationship.

2. Federal Guidelines

The IRS uses a three-factor test to determine whether a worker is an employee or an IC:

• Behavioral control – Does the company control what and how the work is done?
• Financial control – Who determines pay, expenses, and profit opportunities?
• Type of relationship – Are there written contracts, benefits, or long-term commitments?

The Department of Labor (DOL) has intensified enforcement, prioritizing industries prone to misclassification, such as construction, logistics, and tech. Companies need to understand these federal rules and regularly audit worker classifications to stay compliant.

3. State-Specific Laws

Beyond federal guidelines, states like California have added layers of regulation. California’s AB5 law, for example, uses the ABC test, which assumes a worker is an employee unless the company can prove:

• The worker is free from company control.
• The worker is outside the company’s usual course of business.
• The worker is engaged in an independent trade or business.

New York is another state focused on contingent worker issues. The Freelance Isn’t Free Act of 2024 protects freelance workers by requiring written contracts, timely payment, and legal recourse for nonpayment. This law reflects a growing national trend of extending employment-like protections to gig workers and independent contractors.

4. Proper Documentation and Contracts

Every contingent engagement should be backed by a clear, written agreement. Contracts should define:

• Project descriptions
• Scopes of work
• Deadlines
• Deliverables
• Payments
• Payment schedules
• Payment methods
• Cancellation fees
• Deposits
• Reimbursements (if applicable)
• Duration of engagements (i.e., project-based or ongoing)
• Duties (if not included in projects)
• Termination terms
• Determination of worker classification

Depending on the type of work you’re hiring a contingent worker to do, the agreement may also need to include additional clauses involving confidentiality, intellectual property, nondisclosure agreements, and even noncompete agreements.

This documentation not only protects the company legally, but also provides clarity for workers, reducing misunderstandings and disputes.

5. Tax Obligations

Tax responsibilities vary by worker type:

• For W-2 employees, employers withhold federal, Social Security, Medicare, and applicable state taxes.
• For 1099 contractors, workers are responsible for their own taxes – but companies must report payments via Form 1099-NEC and, in some states like Minnesota, apply backup withholding if workers fail to provide taxpayer ID numbers.

Ignoring tax obligations can quickly escalate into fines and audits, so companies should regularly review their payroll practices.

6. Contingent Offers of Employment

A contingent offer of employment is an offer that depends on certain conditions being met — for example, background checks, drug screenings, or project approval. For contingent workers, these offers should:

• Clearly state the temporary nature of the engagement.
• Define what “contingent” means (e.g., project-based, tied to client approval, or funding-dependent).
• Outline responsibilities, payment terms, and classification.

Without this clarity, companies risk workers misunderstanding their status, which can lead to misclassification claims or legal challenges. Including these details in a compliant offer ensures everyone is aligned and protects the company from potential disputes.

Understanding Contingent Worker Rights

All workers have fundamental rights — contingent workers included. Regardless of classification, it’s a company’s legal obligation to provide:

• A safe working environment.
• Protection from discrimination, harassment, and unfair treatment.
• Freedom to organize or join labor unions.

Beyond these universal rights, many states have introduced expanded protections specifically for contingent workers. Depending on the jurisdiction, contingent workers may also be entitled to:

• Overtime pay.
• Sick leave and family leave.
• Rest and meal breaks.
• Paid time off or holiday pay in certain cases.

For example, some states and cities — including New York, California, and Massachusetts — have passed laws extending paid sick leave or minimum wage guarantees to gig workers and independent contractors.

With labor laws continually evolving, companies must stay current on federal, state, and Occupational Safety and Health Administration (OSHA) regulations. Failing to comply can result in fines, back pay, legal disputes, or even reputational damage.

Maintaining compliance isn’t just about avoiding penalties — it’s about building trust with the contingent workforce and demonstrating that your organization values fair and ethical treatment for all workers.

How IES Simplifies Contingent Workforce Compliance

The rapid rise of contingent labor presents exciting opportunities — and serious compliance challenges. For 50 years, Innovative Employee Solutions (IES) has helped businesses confidently navigate contingent workforce compliance by providing:

• Accurate classification guidance to reduce misclassification and co-employment risks.
• Payroll and benefits management across all U.S. jurisdictions and 150 countries.
• Full-service Employer of Record and Agent of Record solutions that handle onboarding, compliance, taxes, and more.

Hiring contingent workers? IES is your strategic partner — enabling you to hire top talent anywhere in the world, anytime you need. IES handles compliance and HR so you can focus on business growth . Contact us today and learn more about our full-service EOR solutions.

 

Written by: Kara Hertzog, President of Innovative Employee Solutions

Kara Hertzog is president of Innovative Employee Solutions (IES), a leading provider of remote and contingent workforce solutions, specializing in global Employer of Record, Agent of Record and Independent Contractor compliance services in 150+ countries. Founded in 1974, IES is a woman-owned business, certified by the WBENC and partners with companies to provide compliant employment solutions that empower people’s lives.