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Run the Payroll Fee Auditor →Blog · Payroll Management · E-Commerce
E-Commerce & DTC Brands: Employee Classification for Payroll (2026)
Employee classification in e-commerce companies is two questions: whether warehouse staff and customer service reps are employees or contractors, and whether the employees are exempt from overtime. BEG runs e-commerce company payroll for $45 per employee per month inside the payroll software you already use, all-inclusive, live in 3 to 5 business days.
Employee or contractor: how e-commerce companies get it wrong
Under the FLSA, whether a fulfillment worker is an employee or an independent contractor depends on the economic reality of the relationship, weighed across six factors: opportunity for profit or loss, investments, permanence, control, whether the work is integral to the business, and skill and initiative. Paying a worker on a 1099 or having them sign a contractor agreement does not make them a contractor.
On February 26, 2026 the Department of Labor proposed to rescind its 2024 independent contractor rule, which it is no longer applying in investigations, and replace it with an economic reality test built on two core factors: the worker's control over the work and the worker's opportunity for profit or loss. The comment period closed April 28, 2026 and no final rule had been issued as of the page.
Exempt or non-exempt
Non-exempt employees must receive overtime at not less than time and one-half the regular rate for hours worked over 40 in a workweek, and hours cannot be averaged across weeks. When an employee works at two or more different straight-time rates in one week, the regular rate is the weighted average of those rates.
The salary floor for the executive, administrative and professional exemptions is $684 a week, restored to the 2019 level after the 2024 rule was vacated. Laborers and freight, stock, and material movers, hand at the May 2025 national median of $40,240 a year clear that salary test, so the duties test decides.
What misclassification costs
For tax years beginning after 2025, Form 1099-NEC must be filed for each non-employee paid at least $2,000 for services during the year, up from the prior $600 threshold. The IRS instructions state the threshold may be adjusted for inflation beginning in calendar year 2027.
Reclassifying a contractor as an employee means back FICA at 15.3 percent split between the parties, back FUTA, penalties and interest, and often back overtime under the FLSA at time and one half for two or three years.
The rules behind this page, with sources
General information, not legal advice. Every rule below was read on the agency page linked next to it.
- Under the FLSA, whether a fulfillment worker is an employee or an independent contractor depends on the economic reality of the relationship, weighed across six factors: opportunity for profit or loss, investments, permanence, control, whether the work is integral to the business, and skill and initiative. Paying a worker on a 1099 or having them sign a contractor agreement does not make them a contractor. [DOL Fact Sheet #13]
- On February 26, 2026 the Department of Labor proposed to rescind its 2024 independent contractor rule, which it is no longer applying in investigations, and replace it with an economic reality test built on two core factors: the worker's control over the work and the worker's opportunity for profit or loss. The comment period closed April 28, 2026 and no final rule had been issued as of the page. [DOL WHD 2026 Independent Contractor NPRM]
- Non-exempt employees must receive overtime at not less than time and one-half the regular rate for hours worked over 40 in a workweek, and hours cannot be averaged across weeks. When an employee works at two or more different straight-time rates in one week, the regular rate is the weighted average of those rates. [DOL Fact Sheet #23]
- For tax years beginning after 2025, Form 1099-NEC must be filed for each non-employee paid at least $2,000 for services during the year, up from the prior $600 threshold. The IRS instructions state the threshold may be adjusted for inflation beginning in calendar year 2027. [IRS Instructions for Forms 1099-MISC and 1099-NEC (12/2026)]
Read the full guide to the employee versus contractor test, and the rest of the e-commerce company payroll library.
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Frequently Asked Questions
Are warehouse staff in an e-commerce company employees or contractors?
Under the FLSA, whether a fulfillment worker is an employee or an independent contractor depends on the economic reality of the relationship, weighed across six factors: opportunity for profit or loss, investments, permanence, control, whether the work is integral to the business, and skill and initiative. Paying a worker on a 1099 or having them sign a contractor agreement does not make them a contractor.
What does the second test look at?
On February 26, 2026 the Department of Labor proposed to rescind its 2024 independent contractor rule, which it is no longer applying in investigations, and replace it with an economic reality test built on two core factors: the worker's control over the work and the worker's opportunity for profit or loss. The comment period closed April 28, 2026 and no final rule had been issued as of the page.
Which e-commerce company employees can be exempt from overtime?
Non-exempt employees must receive overtime at not less than time and one-half the regular rate for hours worked over 40 in a workweek, and hours cannot be averaged across weeks. When an employee works at two or more different straight-time rates in one week, the regular rate is the weighted average of those rates.
What does managed payroll cost for an e-commerce company?
$45 per employee per month, all-inclusive, inside the payroll software you already use, with no monthly minimum. Seasonal workforce spikes, multi-state nexus payroll tax and contractor vs W-2 for fulfillment are configured at setup, not billed as add-ons.
Related Resources
Anthony leads payroll solutions at Business Executive Group, a national managed payroll firm serving businesses across industries including E-Commerce & DTC Brands. BEG manages payroll at $45 PEPM, all-inclusive, with deep expertise in compliance, multi-state filing, and industry-specific payroll requirements. Get instant pricing at beghr.com.
Authoritative source: IRS: Independent Contractor or Employee
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