Worker misclassification can result in significant penalties. It occurs when an employee is improperly characterized as an independent contractor. In some cases, this misclassification is intentional so that an employer can avoid tax withholding, paying overtime, or purchasing workers' compensation. However, in other cases, it happens only because an employer misunderstood the difference. Generally, an independent contractor exercises a high degree of independent judgment, may work for others, uses his or her own equipment or tools, and may hire people to help. An employee typically uses the employer's tools in the workplace and is more restricted in how he or she performs the work.According to the Department of Labor, the actual quality of the working relationship determines whether you are an independent contractor or an employee. Among the factors to be considered when determining whether there is an employment relationship are the extent to which the work being performed is integral to the employer's business, the permanency of the worker's relationship to the employer, the worker’s exercise of independent judgment or open competition with others, the worker's investment in facilities, and the nature of the employer's control over the work.If a worker is an employee, the employer must compensate him or her according to the FLSA and other employment laws. Unless they are misclassified, independent contractors are not protected under these laws.