There's usually a definition or test, either in statute or case law. In my jurisdiction, whether you have a boss or supervisor is a major factor. Contractors are given a specific task to complete and then they go do it. If you're getting daily monitoring or tasks assigned throughout the day, you're probably an employee.
Like with not paying minimum wage or illegal deductions, employers often get away with it. The power imbalance is very large for such workers, and even when enforced the fines are often just a cost of doing business. In Ontario, Canada there's a couple billion dollars in unpaid wages every year, and hundreds of investigations for wilful wage nonpayment by managers, yet there has been exactly one jail sentence for it, in the last twenty years. With odds like that, I might steal too!