Why Hiring Independent Contractors as Employees Might Just Raise Costs You Didn’t See Coming

You might like having folks as “contractors” because it feels cheaper, more flexible, fewer headaches… until it isn’t. Bringing them in as employees (or be forced to), and costs like Workman’s Comp and payroll taxes hit you in ways you didn’t budget for. Plus, there’s a new DOL ruling that says you can’t just call someone a contractor if they’re doing the core work of your business.

Here’s what you need to know…

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What the New DOL Rule Says

• On January 10, 2024, the U.S. Department of Labor (DOL) issued a final rule under the Fair Labor Standards Act (FLSA) called “Employee or Independent Contractor Classification Under the FLSA”, effective March 11, 2024. Read more here from the DOL.
• This rule rescinded the 2021 IC Rule and put back a more comprehensive test (sometimes called an “economic reality” test) to determine whether someone is truly an independent contractor or must be treated as an employee.
• Key factor in this rule: “the extent to which the work performed is an integral part of the employer’s business”. If contractors are doing what your business exists to do, chances are they need to be employees.

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What That Means If You’re Switching Contractors to Employees

You might have independent contractors doing essential tasks — maybe client work or product delivery or whatever your revenue stream depends on. Under the new rule, if:

• They’re not free from your control (you’re giving them instructions, determining hours, etc.), or
• The work is permanent or long-term, or
• The role is integral to what your business does,

…then they likely need to be classified as employees, not contractors.

Switching them over isn’t just “flip a 1099 to W-2.” It means extra costs that often get overlooked.

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The Hidden Costs You Didn’t Budget For

When someone becomes an employee, you suddenly owe or have to deal with:

Cost	What It Adds Up To
Payroll taxes	FICA (employee portion + employer portion), federal & state unemployment taxes, etc.
Workman’s Comp	Premiums often calculated as a % of your total payroll. More payroll = higher premiums.
Unemployment Insurance	States make you contribute; you can’t just offload this.
Benefits & Overhead	Even if you don’t offer health insurance, there may be other costs (equipment, payroll processing, HR).
Liability & Compliance	Mistakes on classification = fines, back taxes + interest.

So yes, that contractor you were “saving money on” might quietly be costing you 20-30% more when you do the math right. And sometimes more.

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Real Talk: Raise You Didn’t Even Notice

Let me break it down in business owner math:

Say you bring someone in as an employee instead of contractor:

• You were paying them $4,000/month as contractor = $48,000/year.
• As an employee, add payroll tax, employer health/benefits (if any), workers’ comp, unemployment, etc. Let’s say those add 25% on top. That’s another $12,000.
• Plus administrative costs (payroll setup, HR compliance). Another $1,000–$2,000.

Boom — the “cheaper path” becomes $60,000+ instead of $48,000.

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Why It’s Actually Worth It

Even though it costs more, there are reasons to make someone an employee:

• Less legal risk (with DOL, state labor boards, etc.)
• More predictable reports and payroll (fewer surprises)
• Potential for better retention, loyalty, etc.

And with the 2024 DOL rule, misclassifying contractors is more risky than before. If you’re caught, you can be on the hook for back pay, overtime, penalties. Read more here from HR Daily Advisor

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What You Should Do If You’re Switching or Considering It

1. Audit your current contractors. List who does what, how often, how much control you have over them.
2. Map them to the DOL’s test. Use the six factors: economic dependence; control; permanence; degree of integration; etc. Read more here from HR Daily Advisor
3. Project the real cost. Include all hidden costs (payroll taxes, comp, benefits, admin).
4. Update contracts and policies. If someone is going to be W-2, get the paperwork, withholdings, reporting all set.
5. Talk to a bookkeeper / HR / legal advisor. Don’t guess. The cost of getting it wrong tends to be way higher than getting it right up front.

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Final Word

If your contractors are doing the work that makes your business what it is, under the 2024 DOL rule, they probably should be employees. Yes, that means higher costs — but the question isn’t “can I avoid those costs?” It’s “can I afford not to when the law says otherwise and the financial risks are real?”

👉 Want out FREE resource “Contractors vs Employees: What to know before you Hire” at this link. If you have additional questions or need assistance in working through these questions or setting up payroll for your business, be sure to get in touch with us here.