So why is misclassification such a big deal?
Well, for taxing authorities, classifying a worker as a contractor rather than an employee results in lost tax revenue. For others, it means the worker will not receive the benefit of employment-related legal protections and benefits that the worker may otherwise be entitled to. For the businesses that incorrectly classify employees as independent contractors, it can be a “make or break” scenario. That’s because getting it wrong can mean the business may be on the hook for:
- Payment of back wages and benefits that were neither anticipated nor budgeted for
- Employment-related taxes on all wages owed to the misclassified worker(s)
- Fines, interest, and/or other penalties, including attorney fees, if the mistake is uncovered by the regulatory agency, or in connection with a civil claim brought by the worker
- Additional workers' compensation insurance premiums and potential claims for workplace injuries
- Liability for employment-related claims by the misclassified worker, including anti-discrimination, anti-retaliation, wage and hour, workplace safety and health, and protected leave laws
These amounts can be staggering for even a single misclassified worker. Where there are multiple workers, the figures grow exponentially. This can even happen where an otherwise properly classified contractor employed its own workers to perform services, but didn’t follow the requisite formalities.
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