Figuring out how to classify workers who perform duties for your business may not seem like a big deal. But in reality, misclassification can result in harsh penalties that can rock your business’s financial stability. If you want to prevent that from happening to you, it’s best that you gain a better understanding of the law and how it applies to your set of circumstances.
Why misclassification occurs
The primary driving force behind worker misclassification is financial in nature. Employers are not required to pay taxes for these workers or provide them with other rights afforded by state and federal laws. For example, independent contractors don’t have to be paid overtime, and their employer doesn’t have to provide them with paid time off or protection under workers’ compensation. Therefore, businesses that utilize independent contractors can end up saving a lot of money.
How is proper classification determined?
There are a number of tests out there to determine if a worker should be classified as an employee or an independent contractor. The main factors in those tests include the following:
- The amount of control that the business retains over the worker
- The amount of control that the business has over the worker’s tasks
- Whether the work is outside the general scope of the business’s normal operations
- Whether the worker regularly engages in the kind of work in question on an independent basis
There may be other factors that are relevant to your situation, such as whether a contract exists between you and the worker and whether any benefits have been provided. For example, providing the worker with training and equipment, as well as dictating how and when the work can be conducted will make the relationship appear more like one involving an employer and an employee rather than an employer and an independent contractor.
Why does misclassification matter?
Properly classifying a worker as an independent contractor can save you a lot of money. But what if you misclassify a worker?
The stakes are high there, as well. In fact, the IRS may fine you thousands of dollars for each misclassified employee, and state law penalties can run as high as $15,000 for each violation. As if that’s not enough, the employee who was misclassified may also be able to take legal action against you in hopes of recovering compensation for benefits that should’ve been provided as well as unpaid overtime. You might be responsible for back taxes and other penalties, too. In other words, misclassifying an employee can leave financial devastation in its wake.
What can you do to protect your interests?
Fortunately, there are things that you can do to protect yourself from worker misclassification. First, you should constantly revisit the factors that a court will take into account if it’s forced to address the matter. You should self-audit your workers to ensure that you have a clear picture of your relationship with them. You can also file a form with the IRS to seek clarification as to how the worker should be classified if you’re worried about it or you have a disagreement with a worker about how they should be classified. If you can, it’s best to get ahead of this issue before it becomes problematic.
However, even if it’s too late to do that, you may be able to effectively defend yourself if you’ve been accused of misclassification. Consult a legal professional to learn about the law and how it applies to your set of circumstances.