As a small-business owner, whether you properly classify workers as employees or independent contractors (ICs) saves you time and money in the long run. Learn the risks involved with misclassifying workers and how partnering with Innovative Employee Solutions can help mitigate those risks. 

  • Typical Reasons for Misclassification

Because employees are subject to more federal, state, and local employment and labor laws, including payroll tax withholdings, worker’s compensation, unemployment insurance, health care insurance, and other benefits, employers may classify workers as ICs to avoid taking on many of these responsibilities. However, the U.S. Department of Labor’s Wage and Hour Division (WHD) is concerned about the lower tax revenues for the government that result from classifying employees as ICs.

In 2012, the WHD began hiring hundreds more investigators to determine whether workers were being properly classified. Over $7 billion in revenue is expected to be collected by 2022 due to properly classifying workers as employees rather than ICs.

  • Penalties for Misclassification

The consequences of misclassifying workers may include hefty fines, taxes, and lawsuits. For example, in April 2016, Uber settled a class action lawsuit that was filed by drivers in California and Massachusetts for $100 million. In May 2013, the Department of Labor (DOL) recovered more than $1 million in retroactive overtime pay and benefits for 196 employees of a Kentucky-based cable installation company. In 2012 and 2013, the DOL collected over $18.2 million in back wages for 19,000 employees misclassified as ICs. You definitely don’t want to be facing similar lawsuits with your small business.

  • Properly Classifying Workers

In July 2015, the WHD published guidelines for properly classifying workers under the Fair Labor Standards Act (FSLA), which rules how minimum wage and overtime are paid for non-exempt employees. The main determinant as to whether a worker is an employee or an IC is whether the worker is financially dependent on the employer or is in business for themselves. For example, if the tasks performed by the worker are required for the business to operate, the worker is to be classified as an employee. Also, the worker’s opportunity for making or losing money for the company, such as hiring others or purchasing materials, classifies them as an employee. In contrast, if a worker typically makes investments in their company that don’t pertain to one particular job and help their business grow, the worker is to be classified as an IC. Also, when a worker sets their own hours and typically works independently, they are to be classified as an IC.

  • Partner with IES to Avoid Misclassification

Partner with IES as your employer of record to take advantage of our IC compliance services. Our comprehensive screening process examines the worker, job description, and nature of employment to verify whether a worker is an IC. We continue the process on a regular basis to ensure ongoing compliance.

Save yourself the time and cost involved with evaluating a worker’s proper classification. Reach out to the trained staff at Innovative Employee Solutions today!

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