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Worker Misclassification Audit

A worker misclassification audit that runs each contractor through the ABC test and the economic-reality test side by side, cites each answer, and leaves each call to the employment partner.

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Walk the audit from vendor list to signed memo ↓

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The problem

The spreadsheet hides the contractor who passes one test and fails the other

An associate pulls the client's vendor list and opens each contractor's agreement, statements of work, invoices and emails, then types an answer into one column per factor. The reasons stay in the associate's head, and the cites rarely make it into the grid.

The tests disagree. The stricter ABC test makes a worker an employee on any one failed prong, while the economic-reality test weighs control and the chance of profit or loss. A fixed weekly standup or years of unbroken statements of work sit in threads nobody rereads, and the partner signs a memo drawn from the grid without the passages behind it.

Built forEmployment partnersEmployment associatesParalegalsIn-house counsel

The Problem Today

Some states presume a contractor is an employee, and one former contractor's unemployment claim can open an audit of everyone paid the same way.

4: states presume an employee unless all three ABC prongs are met published
$100M: paid by one company after a single state audit of its drivers published

Tested by hand today

Agreements
Invoices
Emails
Org charts

Hours per contractorEach agreement, invoice and email read and typed into a grid
The tests disagreeA worker can pass the looser test and fail the stricter one

The Solution

Each document readAgreements, invoices and emails read for control, the work and pay
Both tests, side by sideThe state test and the economic-reality test run on the same worker
Exposure sizedBack taxes by state and by worker, with penalties kept apart
The partner decidesEach worker decided with a reason, and the privileged memo signed

Built-in controls

Only the partner decides a classification
Each output marked privileged and confidential
No client file goes into model training

What You Get

Counsel gets a signed answer for each worker under each test, with a plan and a price for the client.

One tree per workerEach prong and factor answered, with the passage behind it
A plan with datesWho moves to payroll, who is asked, whose papers change
Exposure before the state asksBack taxes by state, and uncertain workers as a range

The audit, part by part

A worker misclassification audit that holds each contractor to each test

From the 1099 list to the signed memo, each feature below is a screen counsel works in, with how it runs and who relies on it.

01Contractors and documents
A risk-ranked list of 1099 payees, each with the documents read
How it works
- The client's 1099 list loaded: 86 payees across 9 states
- 340 agreements, 2,100 invoices and 1,260 emails read, with 42 job descriptions
- Each row counts the agreements, invoices and emails read for that worker
- Each test's answer and a risk score rank the list, highest first
ParalegalUploads the client's documents once and sees each one read and tied to a worker.
02Tests by state
A state-by-test grid of workers who pass one test and fail another
How it works
- Each state's governing test and law, beside the economic-reality answer
- 51 workers under the ABC test: 19 fail, 5 uncertain, 27 pass
- All 86 under economic reality: 6 employee, 5 uncertain, 75 contractor
- A grid of both answers isolates 10 who pass economic reality and fail ABC
Employment partnerSees in one grid the workers a review under one test alone would have left on a 1099, before a state auditor finds them.
03Test tree
One test tree per worker, each prong and factor its own branch
How it works
- One branch per test: the exemption gate, prongs A, B and C, then five factors
- Each branch answered from the documents, with its citation
- Each test ends in its own verdict, and a last node waits for counsel
- Contractor 12 comes out employee under ABC and contractor on economic reality
Employment partnerGets both answers for one contractor on one page, with the branch that decides each, where a spreadsheet row gave one answer and no cite.
04Evidence per factor
Evidence per factor: the agent's reasoning, confidence and source passage
How it works
- Each prong and factor shows the agent's answer and its confidence
- Prong B fails at 94%, citing the services agreement, the org chart and a job description
- Agree with an answer, or change it with a reason code
- The cited clause opens on the right, the deciding words highlighted
Employment associateReviews each tree against its sources in one sitting, and leaves a written reason beside each answer changed.
05Partner's decision
A decision only the partner marks, its reason written into the memo
How it works
- Four choices: reclassify, restructure, keep with fixes, or ask for more facts
- Both test answers sit above the choice
- The reason goes into the memo and the audit trail
- The agents' answers and the associate's review stay on the record beside it
Employment partnerDecides each classification with the clause in view and a reason the client will read.
06Fact requests
One question per uncertain worker, drafted from the branch in doubt
How it works
- Below 70% confidence a branch stays uncertain and is never a verdict
- Each request names the branch in doubt and asks one question
- Prong B questions ask for the team's own description of the role
- An attorney approves; the paralegal sends
Employment associateAsks the client for the one missing fact per worker, not a broad document request, with answers due before the decision.
07Back-tax exposure
Back taxes sized by tax, by state and by worker, penalties apart
How it works
- Withholding, both shares of payroll tax, and unemployment and disability contributions
- $410,000 for 19 workers, on $3,420,000 paid over a three-year lookback
- Each worker ranked by exposure, the highest at $30,100
- The willful-misclassification penalty shown apart and left out of the total
Employment associateCan tell the client what moving workers to payroll costs, line by line, with no uncertain penalty inflating the total.
08Reclassification plan
Dated plan: who goes to payroll, who is asked, whose papers change
How it works
- Waves on a weekly calendar, from 7 fact requests to offer letters and first payroll
- 18 current workers move to payroll with pay, title and tenure carried over
- One former worker, whose claim started the audit, owes back taxes only
- 9 who stay get statement-of-work fixes for set hours, standups and open-ended terms
Employment partnerAnswers the general counsel's three questions at once: who moves to payroll, what it costs, and by when.
09Signed memo
A privileged memo that cites each finding, signed after the last decision
How it works
- A privilege header on each page, and findings cited worker by worker
- Question, method, findings, where the tests part ways, exposure and plan
- Signing waits until all 19 who fail have a partner decision
- The associate opened all 214 sources before the review
Employment partnerSigns a memo whose every conclusion traces to a passage, not to a spreadsheet cell.

Contractor 12 passes the economic-reality test and still fails prong B

One release tester under both tests, branch by branch.

Branch	Answer	What it rests on
Business-to-business exemption	Not met	No business tax certificate on file, one of 12 conditions
Prong A, free from control	Passes	The tester sets means, methods, hours and place, and bills per release
Prong B, usual course of business	Fails	The services agreement has the tester test the client's own product before each release
Prong C, independent trade	Passes	Own invoice series, three other clients and insurance
Control, and profit or loss	Lean contractor	Fixed fee per release, a paid sub-tester and a 22-device test lab
Permanence and integration	Lean employee	Unbroken statements of work, and testing inside each release
Result	Split	Employee under the ABC test; contractor on economic reality at 82% confidence

Around the trees

The passages, the uncertain range and the trail behind each worker

Six more views a reviewer opens around the test trees.

Reading new uploads: the contract reader, invoice reader and role matcher finished, and the test runner re-running three trees — **New uploads, read and re-tested**Three new statements of work and 14 invoices are read, then three trees re-run with nothing decided.

Prong B branch opened beside the test tree: the services agreement clause highlighted, 94% confidence, and the org chart and job description cited — **The clause behind prong B**Clicking the failing branch opens the services agreement at clause 2.1, the deciding words highlighted, beside the reasoning and each source.

Profit or loss factor opened on an invoice with a subcontracted tester passed through, leaning contractor at 84% confidence — **Profit or loss, read off an invoice**The core factor leans contractor at 84%: a fixed fee per release, a subcontracted tester passed through, and the contractor's own device lab.

Exposure with the seven uncertain workers switched on: $410,000 of back taxes and $118,000 more hatched, by component and by state — **The uncertain seven as a range**One switch adds as much as $118,000 if all seven uncertain workers prove to be employees, hatched beside the $410,000.

Statement-of-work changes for nine contractors who stay, each with one change such as replacing an hourly rate with a deliverable fee — **Papers fixed for those who stay**Nine contractors who pass both tests get one drafted change each, such as core hours removed or a deliverable fee.

Audit trail of agent runs, the associate's reviews and changes, and the partner's decisions and signature, filterable by agents, people or decisions — **Who classified and who approved**Each agent answer, each change by a person with its reason, and each decision, from intake to signature. Nothing is deleted.

Ten contractors cleared by economic reality, caught by prong B

That split was the largest find in one client's 86 contractors. Three others follow.

Ten who pass one test and fail the other

Each of the ten turns on prong B. A review under economic reality alone would have kept them on a 1099.

An answer the associate changed

Prong B for one worker moved from passes to uncertain, with the reason code that the law applies differently here.

Papers that point to employment

Nine contractors pass both tests on what they do, but their papers carry core hours, standups, hourly rates or automatic renewal.

A penalty kept out of the total

The willful-misclassification penalty, $5,000–15,000 per violation and $10,000–25,000 for a pattern, is shown apart. The memo explains why the audit itself weighs against willfulness.

Agents on the file

The agents read, test and draft; the classification stays with the partner

What each agent reads, and what it is barred from doing.

Contract reader

Reads agreements, statements of work and amendments for control, deliverables, term, exclusivity and pay, citing clause and page.

Never interprets the law; it reports what the document says

Invoice and time reader

Reads invoices and time records for pay pattern, hours, rate changes, subcontracting and signs of other clients.

Never fills in a missing invoice or estimates pay it has not read

Role matcher

Compares each contractor's work with the org chart and job descriptions, for prong B and integration.

Never treats a job title alone as proof

Test runner

Runs each test that applies where the worker works, side by side, answering each prong and factor with cites and a confidence.

Never decides a classification
Never drops a fact that cuts the other way

Exposure estimator

Computes back taxes by component, state and worker, and the range if uncertain workers are employees.

Never adds penalties as if certain
Shows its assumptions beside each figure

Memo drafter

Drafts the privileged memo, the reclassification plan and the fact requests, each fact cited.

Never sends anything
Never drops the privilege header

Worker misclassification audit: the ABC test, back taxes and who decides

What is a worker misclassification audit?

A worker misclassification audit, also searched as an independent contractor misclassification audit, tests each person paid as a contractor against the tests that apply where they work. This solution reads the agreements, invoices and emails, builds a cited test tree per worker, sizes back taxes and drafts a privileged memo.

What is the ABC test for independent contractors?

Under the ABC test a worker is presumed an employee unless all three prongs are met: free from control, work outside the usual course of the hiring company's business, and an independently established trade. Failing one prong is enough. Each prong is answered with the clause or email behind it.

How do I know if a contractor should be an employee?

Run the worker through each test that applies, side by side. A contractor can pass the economic-reality test, where control and profit or loss weigh most, and still fail the ABC test on prong B. The tree shows both answers.

What happens if a company misclassifies an employee as a contractor?

It can owe back withholding, payroll and unemployment taxes, plus penalties if the misclassification is willful. The solution sizes back taxes by tax, state and worker, shows uncertain workers as a range, and keeps penalties apart.

Who decides each worker's classification?

The employment partner. Agents propose answers with a confidence. The associate reviews each tree and may change an answer, giving the reason. The partner then marks each decision, and that reason goes into the memo. A branch below the confidence threshold stays uncertain.

Does the client see the trees and the drafts?

The client sees signed memos only. Each output is marked privileged and confidential, and the partner's signature comes before anything leaves the firm. Each read, answer, change and decision stays in the audit trail.

Employment & Labor Law

Find the contractor who passes one test
and fails the other.

Start from an audit you already finished: load its vendor list and contracts, and set the test trees beside the memo you sent.

Book a walkthrough Browse solutions

Worker Misclassification Audit

The spreadsheet hides the contractor who passes one test and fails the other

The Problem Today

The Solution

What You Get

A worker misclassification audit that holds each contractor to each test

A risk-ranked list of 1099 payees, each with the documents read

A state-by-test grid of workers who pass one test and fail another

One test tree per worker, each prong and factor its own branch

Evidence per factor: the agent's reasoning, confidence and source passage

A decision only the partner marks, its reason written into the memo

One question per uncertain worker, drafted from the branch in doubt

Back taxes sized by tax, by state and by worker, penalties apart

Dated plan: who goes to payroll, who is asked, whose papers change

A privileged memo that cites each finding, signed after the last decision