When someone is hired, they must be classified as either an employee, or an independent contractor. 

Behavioral Control: If the company has a great deal of control over the behavior of the worker, for example where they work, when they work, or how they perform their jobs, the worker should be classified as an employee. If the company is giving the worker evaluations, extensive or ongoing training about procedures and methods, or is demanding that the worker attend daily meetings or set hours, then the worker is more likely an Employee. Independent contractors will customarily set their own hours, decide on how to implement a project, and dictate where they work.

Financial Control: If a company provides equipment for the worker (tools, software, computers, phone, etc.), often reimburses expenses, and/or pays on regular and ongoing basis, then the worker is more likely to be an employee. The IRS clarifies with the following:

• Significant investment in the equipment the worker uses in working for someone else.
• Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
• Opportunity for profit or loss is often an indicator of an independent contractor.
• Services available to the market. Independent contractors are generally free to seek out business opportunities.
• Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
  https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

Relationship: Perception of the relationship is considered but the interactions between workers and employees is what ultimately defines the relationship. Written contracts are considered; however, an employer cannot classify their workers as independent contractors when they in fact treat them like employees. If the company is providing employee benefits, insurances, paid time off, sick days, or pension plans, then the worker is most likely an employee. Another area to consider is the permanency of the relationship. Employees are more likely to be hired indefinitely and either party can terminate the relationship at any time, for any legal reason. Independent contractors’ rights are subject to a contract.

The consequences for misclassifying employees as independent contractors can include IRS penalties and other nontax implications. The IRS may assess back taxes against the company and demand that the company pay the employees’ share of unpaid payroll and income taxes, regardless of whether or not the independent contractors met those tax obligations. Companies can also expect to pay IRS penalties and interest. Further, workers can file a lawsuit against employers to demand back pay, overtime, and benefits. 

The potential tax and nontax savings do not outweigh the significant cost of misclassifying workers. It’s important to review your hiring policies, even if you are comfortable with your classification of current workers, to ensure that you are meeting all applicable standards for classification. Talk with your advisors if you believe you may have misclassified an employee or have questions about the standards.