Employee misclassification remains a growing issue in Vermont, especially as more workers engage in freelance, contract, or seasonal roles. Mislabeling someone as an independent contractor when they should legally be classified as an employee can have serious consequences—not just for the worker, but for the employer as well. In Vermont, this practice affects access to benefits like workers’ compensation, unemployment insurance, and wage protections, all of which are critical to a worker’s financial stability and safety net.

What Is Employee Misclassification in Vermont?

In Vermont, employee misclassification typically occurs when a business classifies a worker as an independent contractor instead of an employee, despite the nature of their work fitting legal definitions of employment. This often happens in industries like construction, hospitality, delivery services, and home healthcare, where companies attempt to reduce costs by avoiding payroll taxes, benefits, and insurance coverage.

The Vermont Department of Labor and the IRS both use slightly different but overlapping criteria to determine proper classification. Factors include:

• The degree of control the company has over the worker
• Whether the worker supplies their own tools
• The permanence of the working relationship
• The worker’s opportunity for profit or loss

If a worker is economically dependent on the employer and not truly in business for themselves, they are generally considered an employee under Vermont law.

Consequences for Vermont Workers Who Are Misclassified

Misclassified workers in Vermont may unknowingly forfeit essential legal protections and benefits. Here’s how it affects them:

1. No Access to Workers’ Compensation Benefits

In Vermont, employees are entitled to workers’ compensation coverage for injuries sustained on the job. Independent contractors are not. If a misclassified worker gets injured, they may be forced to pay out-of-pocket medical costs or rely on personal health insurance—if they have it.

2. Denial of Unemployment Insurance

Workers laid off or fired from a position that has been misclassified are usually not eligible for unemployment benefits. This creates unnecessary financial hardship during periods of joblessness.

3. Missed Wage and Hour Protections

Misclassified employees often miss out on Vermont's minimum wage protections, overtime pay, and meal or rest breaks. Employers may also fail to track hours properly, leading to underpayment.

4. Lack of Employer-Sponsored Benefits

Properly classified employees may receive benefits such as paid time off, health insurance, and retirement contributions. Independent contractors are not legally entitled to these benefits.

Why Employers Misclassify Workers—And the Risks They Take

Some Vermont employers misclassify workers intentionally to cut labor costs and avoid contributing to unemployment insurance, Social Security, Medicare, or workers’ comp premiums. Others do so out of ignorance, unaware of how state and federal classification rules apply.

But the financial penalties for employers can be steep. If the Vermont Department of Labor determines an employer misclassified workers, consequences may include:

• Back payment of wages and benefits
• Fines and penalties
• Mandatory audits
• Exposure to lawsuits or collective actions

In 2022, Vermont participated in a multi-state task force focused on cracking down on misclassification. State agencies are paying closer attention and responding more aggressively to worker complaints and audit findings.

Legal Tests Used in Vermont to Determine Classification

The “ABC Test” is the standard used in Vermont’s unemployment insurance law to evaluate whether a worker is an independent contractor:

• (A) The worker is free from control or direction in performing the work
• (B) The work is performed outside the usual course of the business or outside of all the places of business
• (C) The worker is customarily engaged in an independently established trade

All three conditions must be met for a worker to be legally considered an independent contractor. This test sets a high bar and favors classification as an employee in many cases.

Workers’ Rights and Recourse if Misclassified

If a Vermont worker suspects they’ve been misclassified, they can take several steps:

• File a complaint with the Vermont Department of Labor (VDOL) for wage violations or benefit denial
• Submit IRS Form SS-8 to have the IRS review the classification for tax purposes
• Pursue legal action through a private attorney to recover back wages or benefits
• Report workplace injuries even if denied workers’ comp, as it may prompt a classification review

Legal action or formal complaints can lead to a reclassification, retroactive benefits, and enforcement against the employer.

Industries Where Misclassification Is Most Common in Vermont

While misclassification can happen in nearly any sector, some Vermont industries are more prone to it:

• Construction: Subcontractors are often treated as contractors despite meeting employee standards
• Agriculture and farming: Seasonal laborers frequently go without proper benefits
• Home health care: Workers may perform duties under direct supervision but be misclassified to avoid benefit obligations
• Transportation and delivery: Drivers are often labeled independent, even when working full-time hours on company schedules

The Vermont Department of Labor has warned employers in these industries to be especially diligent in how they classify their workforce.

How Misclassification Affects Vermont’s Economy and Safety Net

Misclassification doesn’t just hurt workers—it also impacts Vermont’s broader economic system. When workers are denied unemployment benefits or workers’ comp, the public often bears the cost through social service programs. The state also loses out on payroll tax revenue and unemployment insurance contributions, which are essential for funding vital safety nets.

According to a study by the National Employment Law Project, misclassification costs states billions in lost tax revenue annually. Vermont, with its growing gig economy and small business workforce, is not immune to these impacts.

Conclusion

Misclassification of employees in Vermont is more than a technical mistake—it’s a widespread issue that undermines worker protections, public safety nets, and fair business practices. Workers who are improperly labeled as independent contractors risk losing critical benefits, while employers expose themselves to legal and financial consequences. As enforcement efforts increase, it’s essential for both workers and businesses to understand Vermont’s strict classification rules and take action when something doesn’t seem right.

Need Legal Help? Brandon J. Broderick, Attorney at Law is One Phone Call Away

Navigating Vermont Employment Law can be challenging. Fortunately, you don't need to do it alone. The experienced lawyers at Brandon J. Broderick, Attorney at Law, are available 24/7 to help you understand your legal options, gather necessary evidence, and build a strong case to secure the settlement you deserve.

Contact us now for a free legal review.