Paying Workers with a 1099 is Common, but Is It Legal?

Anyone who has taken one of Farm Commons workshops or online courses on farm employment law can guess that most farms aren’t complying with all aspects of the law. Now, we have more information about the extent to which employees are misclassified, and it looks like 22% of businesses aren’t getting it right. This new data coincides with the Biden administration’s ongoing efforts to tighten classification rules last month, painting an uncertain picture of the future.

Even the phrase “worker misclassification” itself can be confusing to businesses. What does it mean to “classify” (let alone misclassify) a worker? From a legal perspective, the issue is straightforward: classification indicates whether the worker is an employee or whether the worker is an independent contractor. Yet, that still doesn’t help most small business owners! Most farms looking to hire don’t think to themselves, “The first step is to classify this person.” The busy farmer is simply looking to get work done, efficiently and quickly.

To make things easier all around, many farmers compensate workers with a Form 1099. The process is simple- there’s no exemptions form, no withholding, no payroll tax calculations- simply give the worker a 1099 at the end of the year. Legally speaking, this is what classifying a worker as an independent contractor is: giving them a Form 1099 instead of a W2 (and thus avoiding the paperwork and costs that go with W2-based wage payments). When the worker does not legally qualify to be treated as an independent contractor- that’s misclassification.

The Minnesota Office of the Legislative Auditor released a study in March 2024 that estimates 22% of businesses misclassified at least one worker. At Farm Commons, we hear of accountants and business advisors who recommend using Forms 1099 instead of regular employment-based wages because it’s easier, without realizing that this is a regulated area of law. There are detailed rules around when a worker may and may not be classified as an independent contractor. This new study indicates just how widespread the problem is, with other reports finding similar data at 10-30% of employers misclassifying workers.

Misclassification leaves the worker holding the bag when it comes to taxes, workers’ compensation, and other benefits. The burden can be significant, with the Economic Policy Institute averaging the cost to each worker at around $7,000 in the form of taxes and lost benefits for workers whose annual earnings are barely above $50,000.

A priority of the Biden administration was to tighten the rules, making it harder for businesses to classify workers as independent contractors. After publishing a draft rule that reinstated a stricter 6-factor test in January, the final rule came into effect on March 11, 2024. However, the shelf life of this new rule may be limited, with 4 lawsuits currently underway that challenge the legitimacy of the rule change. The federal rules are especially relevant to farm businesses nationwide, many of whom are not regulated by state law and fall under the federal Fair Labor Standards Act.

Classification of farm workers isn’t likely to become easy or predictable any time soon. But as a community, we can make a start by helping more farmers understand that they engage in classification every time they decide how to pay a worker. When more folks know that the government has rules that affect the process, farmers will be in a better position to make clear and informed decisions. At the end of the day, that’s why Farm Commons exists.

For more detailed guidance on how individual states govern independent contractor status under state law, see our Selected Essentials in Employment Law series for your state.