How is employee vs contractor status decided in the US?
There are several tests. The IRS uses a common-law test focused on behavioral control, financial control, and the relationship of the parties. The Department of Labor uses an economic-reality test under the FLSA. Some states use the stricter ABC test. All of them look at the substance of the relationship, not the label the parties put on it.
The ABC test, used in California (AB5), Massachusetts, New Jersey, and others, presumes a worker is an employee unless the hiring entity proves all three: (A) the worker is free from control and direction, (B) the work is outside the usual course of the hiring entity's business, and (C) the worker is customarily engaged in an independent trade. Because all three must be met, it is difficult to classify workers as contractors.
What are the consequences of misclassification?
A misclassified employee may be owed unpaid minimum wage and overtime under the FLSA, plus the employer's share of Social Security and Medicare taxes, unemployment insurance, and workers' compensation coverage. Employers can face back taxes, penalties, and liability under wage and anti-discrimination laws. Workers also gain benefits and protections they were wrongly denied.
Does calling me a 1099 contractor make it official?
No. Issuing a 1099 and having you sign a contractor agreement does not determine your legal status. Agencies and courts look at the economic reality and degree of control. If you function like an employee — closely supervised, integrated into the business, economically dependent on one company — you may be an employee regardless of the paperwork.