The classification of workers is growing and changing. Do you know what the consequences are of misclassifying employees and/or independent contractors? Let’s discuss.
Factors for Classifying Employees
In order to understand the classification criteria for workers, you have to know the factors that affect classification as defined by the IRS:
- Behavioral control – Who controls the work and how the worker completes the job?
- Financial control – Who controls the financial and business aspects of the work – including how the worker gets paid, how expenses are reimbursed, and who provides the tools, materials, or supplies?
- Relationship of the parties – Are there benefits like pension plans, insurance, vacation time? Will the relationship continue? Is the work being performed a key component of the business?
Consequences of Misclassifying Workers
Misclassifying workers as independent contractors come with a host of consequences:
Violations of Wage Law
Failing to pay overtime and minimum wage is a violation of the Fair Labor Standards Act (FLSA) and offending employers are subject to criminal penalties and liability for back wages.
More than the penalties, though, the damage caused by damages and legal fees can put your business in a bad way as well.
Form I-9 is used to verify the identity and employment authorization of anyone hired for employment in the United States – citizens and noncitizens alike. Certain industries are less closely controlled, including construction, home healthcare, warehousing, and the like.
I-9 violations include refusal to keep the proper paperwork on file and penalties include civil fines, criminal penalties, debarment from government contracts, back pay fines, and more.
There are many legal actions that can be taken when you misclassify workers. Stoke broke down the following legal penalties.
Class-action lawsuits come from large numbers of employees seeking punitive damages, compensation, and more. The legal costs very often outweigh the government fines and payments.
There are also criminal penalties that can be incurred – employers are subject to penalties of up to $1,000 per misclassified worker and one year in prison.
Other Penalties & Consequences
Even more than fines, fees, and litigation, the misclassification of workers can also tarnish your business’s reputation, which then limits prospects and other business growth opportunities. Quality talent will not want to get involved with a company if it is involved in suspected illicit activities.
And even if you remedy the issues, that reputation is slow to recover. And if your business is looking to pursue funding for new projects or initiatives, go public with a new stock offering, or attract other investors who would want to acquire your company, that reputation will likely take those offers and opportunities off the table.
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