I'm surprised no one has said this: this is illegal in most of the US (definitely in CA). Contractors cannot do the same job as employees. It is skirting the

I'm surprised no one has said this: this is illegal in most of the US (definitely in CA). Contractors cannot do the same job as employees. It is skirting the labor by doing this, and circumventing employment taxes. In the economic hard times, many states (WA, CA, MA) are going after companies that do this. Yes, auditing and fines. You might think they won't find you. Well, here's how they will: contractor Joe has been working for you for 3 years. You decide you don't want him anymore (for a variety of reasons). He files for unemployment, even though he's not supposed to. He figures, hey, I'm an employee so I deserve it. In CA, the EDD will use this red flag to audit, likely find that Joe was an employee, fine the company and give Joe his unemployment insurance. I'm not passing judgement here, just stating the facts.