A question that never seems to die, sort of like Frankenstein's monster. An employer giving the wrong answer is looking at a variety of problems. I remember reading a few years ago about the IRS scrutinizing small businesses about whether subcontractors were actually subcontractors.
Workplace Prof Blog's post,More on Independent Contractors vs. Employees, makes me think that the problem still exists and may be even bigger than might the conventional wisdom. Workplace Prof Blog has a very succinct description of the problem:
One of the most important threshold issues in any area of employment law is whether a worker should be classified as an independent contractor or an employee. Not only is this classification important for determining whether an employer meets the employee threshold for a statute, but it also indicates whether a worker can bring a lawsuit under these statutes and how a company has to treat a worker regarding such things as employee benefits.
I will point out two ares of law where the classification makes a difference: 1) as alluded to above, tax law; and 2) worker's compensation. From my experience, employers know about those two areas of law and are precisely the reason for miscategorizing workers. Employers cut their costs (employee withholding and workmen compensation premiums) by characterizing employees as subcontractors. This a risky and shortsighted plan.
I suggest any employer who thinks about labelling their employees as subcontractors read the post at Workplace Prof - including his links to other sites.