Hiring independent contractors can save companies money. Instead of the ongoing financial obligation to pay a salary, they only need to pay for services rendered during specific projects.
Independent contractors provide companies with flexibility to scale up or down to current demand levels and reduce overall staffing expenses. However, classifying workers as independent contractors can be a costly decision if those workers take legal action to assert that they are actually employees and the company has misclassified them.
Should court authorities rule in favor of employees alleging misclassification, companies may incur substantial expenses, including the three below.
1. Legal expenses
Employers may spend tens of thousands of dollars on court costs and representation during a misclassification lawsuit. In some cases, a ruling in favor of the workers could also result in the courts ordering the company to pay for the legal representation of the employees who brought the lawsuit initially.
2. Employment taxes
Employers pay certain taxes on behalf of employees that they do not cover for independent contractors. Should the courts determine that misclassification occurred, employers may face a sizable past-due tax bill for the amount they failed to pay, interest and possibly even penalties.
3. Injury-related expenses
Many misclassification lawsuits begin with an on-the-job injury that reveals a professional is not eligible for workers’ compensation. Should the courts determine that the company misclassified the worker, the business may face financial losses related to an injury or work-acquired illness.
Reviewing hiring decisions with a legal professional can help employers avoid scenarios in which employees are justified in claiming misclassification. Small and mid-size businesses may need guidance to better ensure that they adhere to the law and do not expose themselves when hiring new workers, and that’s okay.