Misclassifying Employees: A Risk Not Worth Taking

a misclassified employee on a job site

Misclassifying Employees: A Risk Not Worth Taking

Misclassifying employees as independent contractors to reduce your workers’ compensation insurance costs may seem like a good idea, but it’s not. It can spell disaster. Here’s why you want to ensure that your company reports classifications accurately, every time.

Increased State Fines

Pennsylvania passed the Construction Workplace Misclassification Act in 2015 after investigations skyrocketed from 50 in 2014 to 297 in 2015. The Department of Labor & Industry collected $217,450.00 in fines in 2015 compared to $12,700 the previous year.

In California “willful” misclassification carries penalties between $5,000 and$15,000 per violation. If the company repeats the practice, they can pay between $10,000 and $25,000 per violation.

The law also includes a “joint and several liability” clause which means multiple parties can be held liable for the same violation and must pay the entire fine. CEOs and board members may end up in court if they knowingly advise someone to misclassify a worker.

Other states will probably follow suit, as government agencies increase enforcement efforts.

IRS Fines & Back Taxes

The IRS may also impose huge fines and penalties if you fail to adhere to their complicated classifications standards. This is because they lose revenue when you circumvent your tax obligations.

Fines may be as high as 100% of the employment tax outstanding and your company may also be held liable for Social Security taxes, federal income tax, and unemployment tax insurance.

Exposure to Lawsuits

Today, work frequently occurs outside the workplace. Many companies classify workers as independent contractors, because of the cost benefits and the improved efficiency. However, misclassification can expose your company to expensive lawsuits, because misclassified employees lose workplace protections. Employee protection laws allowing civil liability continue to increase and lawsuits aren’t uncommon.

Independent contractors pay more taxes, don’t receive overtime pay, and are often ineligible for unemployment insurance and disability compensation. If workers believe they’re treated unfairly, they can sue for wages, Labor Code violations, and lost compensation. They may file an independent or class-action lawsuit. In some cases, workers can recover up to double what is owed to them.

Increased Targeted Enforcement

The Department of Labor, the IRS, and state equivalents have revved up enforcement efforts for particular industries known to hire independent contractors. These include everything from transportation companies to janitors and child care workers.

Reducing Risk

Experts recommend you enlist a professional if you do not know how to classify an employee. Relying on human resources to classify employees is a dangerous practice, if they do not have the expertise.

Employment law and compliance issues change frequently, so it is important you utilize current information. Experts also recommend companies establish standards and practices to avoid misclassification. These include:

  • regular reviews to ensure the employee’s role and classification agree
  • maintaining current documentation
  • preparing independent contractor agreements including scope of the work, compensation, time limitations, and tax obligations
  • requiring a Form W-9, Request for Taxpayer Identification Number and Certification
  • insisting on contractor liability insurance, professional license, & invoices
  • never providing contractors with equipment, employee-related benefits, or paying their expenses

Gilbert’s Risk Solutions’ stays current on labor law and workers’ compensation classification codes. We offer expert advice so your business can comply with state and federal laws and avoid costly errors.

We’re local and reliable and easy to talk to, so contact us to discuss your insurance needs. We’ve helped people for over 160 years, and we’re here for you, too.

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