Misclassifying workers as independent contractors instead of employees is more than just a technical error. What may initially seem like a minor oversight can result in significant legal and financial consequences for the employer.
One of the risks of employee misclassification is potential lawsuits. Misclassified workers can file claims to recover unpaid wages, including overtime pay and paid time off with interests, among other work benefits they were rightfully denied. This is on top of other compensatory damages like attorney fees and legal costs.
You may also owe the Internal Revenue Service (IRS) if it determines that you intentionally misclassified employees to avoid paying taxes. It could lead to financial penalties to deter other employers. Below are some tips that can help mitigate the risks of employee misclassification.
Understand the differences between employees and contractors
Understanding the legal distinction between employees and independent contractors can help avoid costly blunders. Employees typically work under the direct control of their employer, receive consistent wages and are entitled to benefits like health insurance and workers’ compensation.
On the other hand, independent contractors have more autonomy in discharging their duties and are paid per project or contract. Familiarizing yourself with the IRS and Department of Labor guidelines can help ensure compliance and save you a lot of trouble.
Use written contracts carefully
Employment contracts are a crucial tool for defining your relationships with workers. As such, they must be drafted carefully. Remember, simply labeling a worker as an independent contractor in a contract does not make them one in the eyes of the law. Ensure the contract reflects the actual working relationship and complies with legal standards.
Conduct regular classification audits and seek informed guidance
Periodically review the status of your workers by conducting internal audits to identify any loopholes and ensure that your hiring staff is up-to-date on the best practices based on the latest regulations. Legal guidance can also be invaluable in helping you create comprehensive and compliant internal policies for protecting your business from such legal and financial risks.