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The dangers of employee misclassification

Posted on January 23rd, 2014 Read time: 1 minutes

The way a company classifies its employees makes a large difference in how the employees get treated. For example, classifying an employee as an independent contractor frees the employer of any responsibility having to do with insurance or taxation. However, it is not legal to simply classify any employee as a contract worker. The Department of Labor (DOL) is cracking down on such cases in what it calls the "The DOL Misclassification Initiative," according to its website. Many local and state governments, along with the IRS, have joined a DOL-led task force to track down companies that misclassify their employees as contract laborers.

There are various tests employed by the government to see whether an employee has been misclassified. These are described by Susan Prince, legal editor for BLR, in a recent article. The tests typically determine who has ultimate control over a worker. If workers are completely independent, then they are truly contractors, but if they rely on their company for financial support, or if the company can largely determine their behavior or if the working contract greatly resembles that for employees, then those workers are misclassified.

One way to avoid this is simply to hire temporary workers through an employer of record. Because the employer of record is employing the workers, it has all the responsibilities associated with taxation, insurance and unemployment benefits.

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