5 Mistakes Hawaiʻi Employers Make When Classifying Workers: Why Getting It Wrong Can Cost More Than You Think
It’s Not Just a Paperwork Detail — It’s a Legal Line
For Hawaiʻi small businesses, it’s easy to blur the line between “employee” and “independent contractor.” You just need an extra pair of hands, right? But in the eyes of the IRS and the Hawaiʻi Department of Labor and Industrial Relations (DLIR), that line matters — a lot.
Misclassifying workers can lead to fines, back taxes, unpaid benefits, and even lawsuits. And in our islands’ tight-knit business community, word travels fast when something goes wrong.
Here are five common mistakes Hawaiʻi employers make when classifying workers — and how to avoid them.
1. ❌ Assuming You Can Choose Their Status
You can’t “opt” to treat someone as a contractor just because it’s simpler. The law decides based on the level of control you have over how they work, not what you call them on paper.
Rule of Thumb:
If you set their schedule, provide their tools, and oversee their methods, they’re likely an employee.
You can’t “opt” to treat someone as a contractor just because it’s simpler. The law decides based on the level of control you have over how they work, not what you call them on paper.
Rule of Thumb:
If you set their schedule, provide their tools, and oversee their methods, they’re likely an employee.
2. ❌ Ignoring the Control Test
Hawaiʻi uses the same general “control test” as the IRS:
- Behavioral control: Do you direct how the work is done?
- Financial control: Do you control how they’re paid or reimbursed?
- Relationship type: Is the relationship ongoing, with benefits or regular hours?
If you answer “yes” to most of these, you probably have an employee — not a contractor.
3. ❌ Forgetting About State Requirements
Even if someone passes the federal IRS test, Hawaiʻi has additional laws. For example, most “employees” must be covered under:
- Prepaid Health Care (PHC) Law
- Temporary Disability Insurance (TDI)
- Unemployment Insurance (UI)
If you’re not offering these benefits to a misclassified worker, you could face penalties from multiple agencies — all at once.
4. ❌ Overlooking Ongoing or Recurring Work
If a contractor works for you regularly — same schedule, same duties, same equipment — the relationship starts to look like employment.
The longer they stay, the higher the risk that regulators or auditors will reclassify them.
Ask yourself: “Would my business operations suffer if this person stopped tomorrow?”
If yes, they’re likely integral to your business — and likely an employee.
5. ❌ Skipping Documentation
A written contractor agreement helps, but it’s not enough. You’ll also need:
- Proof they control their own work
- Evidence they serve other clients
- Invoices instead of timesheets
Proper documentation protects you if your classification is ever questioned.
The Bottom Line
Getting classification wrong doesn’t just cost money — it damages trust with your workers and your reputation in the community. But the good news is, it’s easy to fix when you know what to look for.
With a quick review from our Hawaiʻi-based payroll and HR specialists, you can make sure your team is set up correctly and your business stays compliant, confident, and stress-free.
✅ Your Quick-Check Guide
👉 Download this free checklist or use it to self-audit your team today.
