The line, in plain terms
The tests vary by agency and state, but they circle one question: who controls the work? Contractors control how, when and where they deliver a defined result, typically serve multiple clients, use their own tools, and can profit or lose on the engagement. Employees work under your direction, on your schedule, inside your operation, as an ongoing part of it.
The honest heuristic: if the role looks like a job, set hours, your tools, your supervision, indefinite duration, one client, calling it contracting does not make it so, and several states now apply presumption tests stricter than the traditional factors. Price the employee version before the incentive to squint distorts the read.
The paper each relationship needs
Employees: an offer letter with role, pay, classification for overtime purposes and at-will language where applicable; required government verification and tax forms; policy acknowledgments; and confidentiality plus IP assignment terms. Contractors: a services agreement with a defined scope and deliverables, payment terms, independence language that matches reality, IP assignment, confidentiality, and their tax information collected before the first payment, not at year-end panic.
The paper must match the practice: an agreement reciting independence while the engagement runs like employment protects nobody, because auditors and courts read behavior, not labels.
Offboarding closes loops
Departures are where sloppy paper detonates. For employees: final pay per your state’s timing rules, benefits notices, equipment and access recovered the same day, and a reminder of surviving obligations like confidentiality. For contractors: final deliverables and assignments confirmed received, access revoked, and the file retained, because the classification question can be asked years later and your records are the defense.
A one page offboarding checklist per relationship type turns the worst week to improvise into a routine, and routine is the goal of every page in this series.
Both relationship types, templated and tracked
The Legal Desk holds the document sets for both sides of the line: contractor agreements with real scope, independence and assignment language, offer letter and policy patterns, and a repository that keeps every signed instance with its dates, so the file exists when a question arrives years later.
Classification judgment on close calls belongs with employment counsel, one click away with your facts organized. Velora explains any clause in plain language first. From the Plus membership.
This guide is operational education for business owners, not legal advice. Laws vary by state and country; have licensed counsel review anything material before you rely on it.
Frequently asked questions
What is the main test for contractor status?
Control: contractors control how a defined result gets delivered, with their own tools and multiple clients. If the role runs like a job, the label will not survive an audit.
What paperwork does a contractor need before starting?
A services agreement with scope, payment terms, honest independence language, IP assignment and confidentiality, plus their tax information collected before the first payment.
What happens if I misclassify a worker?
Retroactive taxes and penalties, potential wage and benefits claims, and unwound cost savings, arriving together. Pricing the employee version honestly up front is cheaper than the correction.