The Legal Consequences Of Independent Contractor Or Employee Misclassification: Risks And Compliance Guidelines

Industry Information | August 4, 2023

When your organization is engaging contractors, it is important that they are properly classified. Without doing so, your company could face complicated and costly consequences. In this blog, we discuss the risks of independent contractor vs. employee misclassification.

When it comes to properly classifying employees and independent contractors, a lot can rise and fall based on technicality. Misclassifying any of the contractors you engage can have consequences to you and to your contractors. Misclassification often results in problems related to wages, taxes, and benefits and can land your company in serious legal or financial trouble as a result.

Independent Contractors VS. Employees: What’s The Difference?

The first step in setting your company up for success when it comes to properly classifying employees and independent contractors is to understand the differences between both and why those differences matter. Employees are protected under the Fair Labor Standards Act and are afforded unique benefits, minimum-wage pay, overtime pay, and sometimes paid leave.

Independent contractors possess more individual autonomy when they engage with your company. They use their own tools and equipment to perform their services, and your company does not need to the same protections that employees have. Independent contractors are also responsible to provide their own insurance coverage, pay their own taxes, and provide their own benefits.

Risks of Misclassifying Employees as Independent Contractors

When employees are incorrectly classified as contractors, they may miss out on the benefits and protections afforded to them, leading to potential financial problems and complications. Intentionally misclassifying employees as independent contractors to reduce payroll costs and evade financial responsibilities is an unlawful practice that should be avoided at all costs.

Failing to properly classify employees can lead to serious consequences, as it is a violation taken very seriously by the Internal Revenue Service (IRS). Proactively ensuring correct classification of workers is crucial to prevent legal challenges, audits, damage to your brand reputation, and potential issues with tax authorities. It is essential for your company to be diligent in accurately classifying employees and contractors to avoid the risks associated with misclassification. By doing so, you not only comply with legal requirements but also protect your business’s integrity, financial stability, and overall reputation.

Problems with Tax Filing Due to Employee vs. Independent Contractor Misclassification

Misclassifying workers as either employees or independent contractors can also lead to significant challenges and complications when it comes to tax filing. It is crucial for organizations working with these types of workers to understand the implications and ensure proper classification to avoid tax-related issues. When workers are misclassified, it can result in incorrect tax reporting and withholding.

For employees, companies are responsible for withholding income taxes, Social Security taxes, and Medicare taxes from their wages. On the other hand, independent contractors are responsible for paying their own self-employment taxes, including both the employer and employee portions of Social Security and Medicare taxes. Misclassifying employees as independent contractors can lead to the underpayment or non-payment of required payroll taxes. This can result in severe penalties and liabilities for the company, including interest charges and potential legal consequences.

Additionally, misclassified workers may face challenges when filing their own taxes, as their income may not have been reported accurately or necessary tax forms may not have been provided. To avoid these problems, it is essential for companies to properly classify their workers based on the criteria set by the IRS and other relevant tax authorities. This includes considering factors such as the level of control, the type of relationship, and the nature of the work performed.

It is recommended to consult with legal and tax professionals to ensure compliance and minimize the risks associated with misclassification. By accurately classifying workers as either employees or independent contractors, companies can ensure proper tax reporting, fulfill their tax obligations, and mitigate potential tax-related complications. This not only protects the company from financial and legal repercussions but also promotes a transparent and compliant business environment.

Legal Liability For Employee Misclassification

If an independent contractor is misclassified as an employee, the first step they are often advised to take is to consult an employment lawyer. If your company has misclassified them, you could be responsible both legally and financially for covering legal fees and for compensating the contractor.

Intentional employee misclassification is a dishonest and self-interested choice that some companies make to serve their own financial interests. Incidences of misclassification have seen an unfortunate upswing in occurrence as the world of contract work continues to grow. As is seen in these cases that were reported by employees across the United States, misclassification results in workers being denied rights and privileges they are legally owed and compels them to demand rightful compensation.

Compliance Guidelines That Will Help Your Company Avoid Misclassification The IRS, individual states, and the Department of Labor (DOL) have different tenets that are used to distinguish independent contractors from employees, so it is important to find out what those are in your company’s state. The Department of Labor has information about classification on their website.

Make Working With Contractors Easier With PlusOne Solutions

Working with contractors comes with a wide range of complications. Don’t let compliance to your organization’s requirements be one of them. Simplify the contractor engagement experience by contacting PlusOne Solutions today.

Contents are provided for information purposes only and should not be construed as legal advice. Users are reminded to seek legal counsel with respect to their obligations and use of PlusOne Solutions services.

About PlusOne Solutions

PlusOne Solutions has been an industry leader in the risk management field by specializing in compliance programs that meet the complex challenges of geographically dispersed contractors, vendors, and employee networks. PlusOne Solutions protects companies from possible financial, legal, and reputational risks associated with contractor and vendor relationships while creating safer work environments. To learn more, visit https://www.PlusOneSolutions.net.