ARTICLE
The W2 vs. 1099 classification is one of the most misunderstood legal issues in the roofing industry. Many contractors believe that as long as they call a worker an independent contractor, they can classify them as one—but the reality is far more complex. At the 2023 Texas Roofing Conference, Karen Ensley of Ensley Benitez Law, PC, and an RCAT member, provided critical legal insights into the risks associated with misclassifying workers. From tax liability and audits to lawsuits and compliance violations, the consequences of getting this wrong can be devastating for a roofing business. This blog highlights some key takeaways from Ensley’s talk, but it only scratches the surface of what she covered. Her full presentation dives deeper into real-world audit cases, legal nuances, and proactive compliance strategies—well worth watching for any roofing business owner! Link to the full presentation here: https://www.youtube.com/watch?v=08ASRfZUPLQ Understanding W2 vs. 1099: The Core Issue Many roofing contractors assume that as long as they issue a 1099 tax form to a worker, that person is legally an independent contractor—but as Karen explained, this is a common misconception. In reality, worker classification is based on control, not payment method. If a business dictates how, when, and where work is performed, the worker is likely a W2 employee, regardless of what their contract states. A 1099 contractor (independent contractor) should operate with autonomy, setting their own schedule, using their own tools, and being free to take on multiple clients. In contrast, a W2 employee follows company policies, requires training, and has work schedules set by the business. Misclassification can lead to serious legal and financial consequences, including back pay, penalties, and lawsuits. Regulatory agencies like the Texas Workforce Commission (TWC), the Department of Labor (DOL), and the EEOC actively audit businesses suspected of misclassification—sometimes based on complaints from former workers, competitors, or even random industry-wide audits. Ensley stressed that roofing companies must carefully evaluate their worker relationships and seek legal guidance before determining classification. Getting it wrong could result in massive financial liability, making it a risk no roofing business can afford to ignore. Why Should Roofing Contractors Care? Worker classification isn’t just a technicality—getting it wrong can lead to severe financial and legal consequences. Many roofing companies opt for 1099 independent contractors to reduce payroll expenses, but as Karen emphasized in her presentation, misclassification can result in crippling penalties, back taxes, and legal disputes. Tax Liability – Employers save money by not paying payroll taxes, unemployment insurance, or workers' compensation on 1099 workers. However, if an audit determines that these workers should have been classified as W2 employees, the company can be held responsible for years of unpaid taxes, interest, and penalties. Audits – The Texas Workforce Commission (TWC) and the IRS actively investigate worker misclassification, often triggered by disgruntled employees, competitor reports, or even random selection. Once an audit is initiated, the process can be time-consuming, expensive, and stressful. Lawsuits & Penalties – If a worker classified as a 1099 contractor files a complaint, the business may be liable for back pay, unpaid overtime, and damages. Employers found to have knowingly misclassified employees could face liquidated damages and civil penalties, which can quickly add up to hundreds of thousands of dollars. Federal Oversight – Agencies like the Department of Labor (DOL) and the Equal Employment Opportunity Commission (EEOC) have become more aggressive in pursuing worker misclassification cases. Roofing companies found in violation may also face federal lawsuits, making compliance even more critical. Ensley made it clear: the risks of misclassification far outweigh the short-term savings of using 1099 workers without proper legal compliance. What Triggers an Audit? Most roofing contractors don’t expect to be audited—until it happens. Karen explained that audits aren’t just random; they are often triggered by specific red flags that catch the attention of the Texas Workforce Commission (TWC), IRS, or Department of Labor (DOL). Unemployment Claims – The most common audit trigger is when a former worker files for unemployment benefits. If they were classified as a 1099 contractor, the TWC will review whether they were actually an employee, opening the door to a full investigation. Competitor Complaints – Roofing is a highly competitive industry, and rival companies can file complaints about improper worker classification. Ensley noted that some audits start because competitors report businesses that use 1099 workers to undercut pricing. Random Audits – The IRS and TWC periodically conduct industry-wide audits targeting businesses with high rates of 1099 contractors. The roofing industry, in particular, is frequently reviewed due to its history of worker misclassification issues. Tax Reporting Discrepancies – The IRS cross-checks company tax returns with 1099 forms submitted by independent contractors. If a roofing company reports high payments to independent contractors but doesn’t have matching business expenses, it can raise a red flag for misclassification. Ensley emphasized that once an audit begins, agencies will scrutinize years of payroll records, contracts, and tax filings. In many cases, they apply the 20-factor test to determine if workers were misclassified—often with costly consequences for roofing contractors. The key takeaway? Prevention is better than damage control. Roofing companies should review their worker classifications now to avoid being caught off guard by an audit later! The 20-Factor Test The Texas Workforce Commission (TWC) uses a 20-factor common law test to determine whether a worker is an employee (W2) or an independent contractor (1099). No single factor is decisive—it’s about the overall relationship between the business and the worker. Key Factors That Indicate an Employee Relationship The employer controls when, where, and how work is performed. The worker receives required training from the company. The worker has set hours and follows company policies. The worker cannot freely work for multiple companies. The employer provides tools, equipment, or uniforms. The worker is reimbursed for expenses and does not operate as an independent business. Key Factors That Indicate a 1099 Independent Contractor The worker sets their own schedule and work methods. The worker supplies their own tools, insurance, and materials. The worker can take jobs from multiple companies without restriction. The worker is paid per job, not hourly or via salary. The worker bears financial risk, including potential losses. As Karen explained, misclassifying workers can lead to audits, back taxes, and legal penalties. Roofing contractors should carefully assess their workforce to stay compliant. The Biggest Legal Risks for Roofers Misclassifying workers isn’t just about making a technical error—it can result in significant financial and legal consequences. Karen highlighted some of the most high-risk areas where roofing contractors often get it wrong. Sales Teams & 1099s – Many roofing companies classify their sales teams as 1099 contractors, but if they control scripts, enforce required training, or dictate schedules, those workers may legally be W2 employees. The more control a company exerts, the more likely it is that an auditor will reclassify sales reps as employees. Crews & Subcontractors – A true independent subcontractor should operate as their own business, taking jobs from multiple clients and providing their own tools. If a roofing crew works only for your company, follows set hours, and relies on your materials, an auditor may determine they are employees—potentially triggering back pay and penalties. Auditor Discretion – Even when companies believe they are following the law, auditors interpret factors differently. Some may focus on financial risk, while others scrutinize contracts, tax filings, or job structures. A company could pass one audit but fail another, making it essential to take a proactive approach to compliance. Avoiding Misclassification: Best Practices for Roofing Contractors While 1099 contractors can provide flexibility and cost savings, misclassification can lead to severe legal and financial consequences. Karen outlined several best practices to help roofing companies minimize risk: Require LLCs – Workers classified as LLCs with a Federal EIN are more likely to pass the 1099 test, reducing audit risk. Use Well-Drafted Contracts – Ensure clear, legally reviewed independent contractor agreements that outline payment structure, work scope, and autonomy. Limit Control – Avoid setting strict work schedules, requiring training, or dictating how tasks must be completed—these factors suggest employee status. Encourage Business Autonomy – Independent contractors should provide their own tools, manage their own expenses, and take jobs from multiple companies. Consult a Legal Professional – Work with construction law attorneys to ensure contracts and business practices comply with TWC, IRS, and DOL guidelines. Taking these preventative steps can help roofing companies avoid audits, legal disputes, and costly penalties. Final Thoughts & Takeaways The W2 vs. 1099 decision isn’t just a business preference—it’s a legal classification that can have serious consequences if mishandled. Misclassification can lead to audits, lawsuits, and substantial fines, making it essential for roofing contractors to understand and comply with worker classification laws. Karen’s insights provide valuable guidance for contractors navigating these challenges. While this blog highlights key takeaways, her full presentation goes even further into audit prevention strategies and legal best practices. A huge thanks to Karen Ensley for sharing her expertise with the RCAT community. To watch her full presentation and gain a deeper understanding of worker classification compliance, check it out here: https://www.youtube.com/watch?v=meS8Qo9mgOE.
Many contractors believe that as long as they call a worker an independent contractor, they can classify them as one—but the reality is far more complex.
At the 2023 Texas Roofing Conference, Karen Ensley of Ensley Benitez Law, PC, and an RCAT member, provided critical legal insights into the risks associated with misclassifying workers.
From tax liability and audits to lawsuits and compliance violations, the consequences of getting this wrong can be devastating for a roofing business.
This blog highlights some key takeaways from Ensley’s talk, but it only scratches the surface of what she covered.
Her full presentation dives deeper into real-world audit cases, legal nuances, and proactive compliance strategies—well worth watching for any roofing business owner!
Link to the full presentation here: https://www.youtube.com/watch?v=08ASRfZUPLQ
Many roofing contractors assume that as long as they issue a 1099 tax form to a worker, that person is legally an independent contractor—but as Karen explained, this is a common misconception.
In reality, worker classification is based on control, not payment method.
If a business dictates how, when, and where work is performed, the worker is likely a W2 employee, regardless of what their contract states.
A 1099 contractor (independent contractor) should operate with autonomy, setting their own schedule, using their own tools, and being free to take on multiple clients.
In contrast, a W2 employee follows company policies, requires training, and has work schedules set by the business.
Misclassification can lead to serious legal and financial consequences, including back pay, penalties, and lawsuits.
Regulatory agencies like the Texas Workforce Commission (TWC), the Department of Labor (DOL), and the EEOC actively audit businesses suspected of misclassification—sometimes based on complaints from former workers, competitors, or even random industry-wide audits.
Ensley stressed that roofing companies must carefully evaluate their worker relationships and seek legal guidance before determining classification.
Getting it wrong could result in massive financial liability, making it a risk no roofing business can afford to ignore.
Worker classification isn’t just a technicality—getting it wrong can lead to severe financial and legal consequences.
Many roofing companies opt for 1099 independent contractors to reduce payroll expenses, but as Karen emphasized in her presentation, misclassification can result in crippling penalties, back taxes, and legal disputes.
Ensley made it clear: the risks of misclassification far outweigh the short-term savings of using 1099 workers without proper legal compliance.
Most roofing contractors don’t expect to be audited—until it happens.
Karen explained that audits aren’t just random; they are often triggered by specific red flags that catch the attention of the Texas Workforce Commission (TWC), IRS, or Department of Labor (DOL).
Ensley emphasized that once an audit begins, agencies will scrutinize years of payroll records, contracts, and tax filings. In many cases, they apply the 20-factor test to determine if workers were misclassified—often with costly consequences for roofing contractors.
The key takeaway?
Prevention is better than damage control.
Roofing companies should review their worker classifications now to avoid being caught off guard by an audit later!
The Texas Workforce Commission (TWC) uses a 20-factor common law test to determine whether a worker is an employee (W2) or an independent contractor (1099).
No single factor is decisive—it’s about the overall relationship between the business and the worker.
As Karen explained, misclassifying workers can lead to audits, back taxes, and legal penalties. Roofing contractors should carefully assess their workforce to stay compliant.
Misclassifying workers isn’t just about making a technical error—it can result in significant financial and legal consequences. Karen highlighted some of the most high-risk areas where roofing contractors often get it wrong.
While 1099 contractors can provide flexibility and cost savings, misclassification can lead to severe legal and financial consequences. Karen outlined several best practices to help roofing companies minimize risk:
Taking these preventative steps can help roofing companies avoid audits, legal disputes, and costly penalties.
The W2 vs. 1099 decision isn’t just a business preference—it’s a legal classification that can have serious consequences if mishandled.
Misclassification can lead to audits, lawsuits, and substantial fines, making it essential for roofing contractors to understand and comply with worker classification laws.
Karen’s insights provide valuable guidance for contractors navigating these challenges.
While this blog highlights key takeaways, her full presentation goes even further into audit prevention strategies and legal best practices.
A huge thanks to Karen Ensley for sharing her expertise with the RCAT community.
To watch her full presentation and gain a deeper understanding of worker classification compliance, check it out here: https://www.youtube.com/watch?v=meS8Qo9mgOE.