I worked for a small startup consulting firm in New Jersey in a leadership position. After a disagreement with a co-worker, both she and I were initially suspended without pay and told to reinterview for our respective positions. BTW: The disagreement in the eyes of the law as well as many was a minor one. I was an editor who critiqued a junior persons work, she couldn't take the criticism and a shouting match ensued with a colleague mediating who then took my co-worker's side. Boss wasn't present. It was found that the suspension without pay was illegal, they paid us the week. My co-worker refused to reinterview and was terminated - also for poor performance since her work quality was poor. I reinterviewed (for a position I created which is demeaning in and of itself) and based on my "attitude" and "lack of cooperation" in helping them successfully execute another project - they determined I could not be an editor anymore. I had been an editor without any incident for 1.5 years and set up the research division. They also would not allow me to assume a lower level position as a research writer because "I was overqualified meaning you are overpaid for the position". They then offered me a 1099 arrangement so I could stay involved with the company and every 3 months would have the opportunity to discuss potential positions. The work would remain the same, writing and possibly editing, plus other projects like marketing work. The 1099 position actually paid a lot more than me being an employee, however I lost benefits, vacation, and the possibility of any advancement/growth. :confused:

Is this legal?

If the work remained the same, and you didn't qualify as an independent contractor before, you don't legally qualify now. The IRS website is down at the moment (that NEVER happens), so I can't give you the link. But basically, if the company has the right to control how and when you do the work, provide you the tools and training to do the work, you don't have a personal financial stake in the outcome of the work (in other words, you don't stand to make a profit or incur a loss), then you are an employee and they cannot "make" you an independent contractor just because they feel like it.