Your business has a lot of operating costs that it cannot control and others that it can take special steps to minimize. Employment costs are one of the biggest regular expenses your organization has to cover, and there are numerous ways that you might reduce those expenses.
Classifying some employees as independent contractors might seem like an effective solution for minimizing some financial obligations your business would otherwise have. However, if those employees later complain and claim that they were not independent contractors, then there could be major consequences for your company.
What are the biggest risks of employee misclassification?
Tax obligations and penalties
Employers typically have to make employment tax contributions, including payments to the Social Security Administration, on behalf of their employees. Some businesses avoid this obligation by classifying many workers as independent contractors.
If a worker successfully disputes their classification as self-employed, the business may face not just past-due taxes starting when they first classified the worker that way but also fine and interests because of those tax mistakes.
Workers’ compensation or unemployment penalties
Employers typically have to carry workers’ compensation insurance for all of their employees, including new hires and part-time staff. They typically also need to contribute to unemployment funds for those workers.
When a business misclassifies an employee as an independent contractor, it may later face penalties for contributions to unemployment and workers’ compensation on behalf of that employee. If the worker misclassified got hurt on the job, the business may have liability for any injury-related costs because workers’ compensation coverage will not apply.
Unpaid wage claims
Overtime wage claims are another concern. Those who are self-employed are not entitled to overtime pay, but hourly workers misclassified as independent contractors could be. Contractors long employed by a company with years of unpaid overtime could make sizable claims against the business for unpaid overtime wages. Those claims could cost a lot of money and do damage to an organization’s reputation as an employer.
Especially with the federal government announcing an intention to crack down on worker misclassification by companies, businesses that have independent contractors on their payroll may need to look closely at their situation to ensure they are compliant with federal and state regulations.
Tracking changes in employment law trends can help companies avoid potentially expensive violations.