Both the federal DOL and state departments are cracking down on misclassification levying some pretty significant fines. For example, the Illinois Department of Labor imposed $328,500 in penalties on a home improvement company for misclassifying 18 workers. In California, the attorney general won $13 million when a court found that two companies misclassified 300 janitors.

The reason why some employers are tempted to misclassify workers is because of this:

Representing regular workers as contractors allows employers to circumvent minimum wage, overtime and antidiscrimination laws. Workers classified as contractors do not get workers’ compensation if injured, unemployment insurance if laid-off and most of the time they don’t receive health insurance or the other benefits that regular employees do.

How do you know if your worker should be an employee or independent contractor? The rule is based on common law principles that define an independent contractor. Basically, the inquiry focuses on the level of control an employer has over a service or product. In other words, workers are considered employees when someone else controls how and when they perform their work. On the other hand, independent contractors are for the most part in business for themselves, they obtain customers on their own and control how they perform their work.

Employers who misclassify workers as independent contractors can end up with substantial tax bills and penalties for failing to pay employment taxes. There’s no magic checklist that makes a worker an employee or independent contractor. It’s a case-by-case analysis, and the key is to consider all the above factors in your specific situation.