5 Employee Misclassification Penalties to Avoid 

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MBO Partners shares five types of penalties that a company can incur if it misclassifies workers as independent contractors:

Here are five consequences of employee misclassification and what your company can do to remain compliant.

1. Violations for Wage Claims

There are a variety of tests and laws used to determine whether or not a worker should be classified as an employee or an independent contractor. The federal government, state government, and government agencies all apply different logic to determine classification, and these laws and tests lack uniformity. This complicates the hiring and vetting process as independent talent may be categorized as employees under one law, but as contractors under another.

Of course, this makes legal compliance difficult. If employers misclassify employees, they may be violating wage, tax, and employment eligibility laws. Organizations can be held liable for failing to pay overtime and minimum wage under the Federal Fair Labor Standards Act (FLSA) as well as under state wage laws. Wage claims may go back as far as three years if a willful violation is found—when an employer knowingly violates the law.

2. Fines and Penalties Resulting from an Audit

When an employee is misclassified, federal and local government lose out on tax and payroll revenue. Employers may be responsible for paying state and federal payroll taxes as well as Social Security and Medicare taxes for all employees found to be classified incorrectly. Penalties can also be imposed for failing to timely deposit payroll taxes.

Lastly, organizations must keep I-9s on record for each of their employees to prove their employment eligibility. If an independent contractor should’ve been classified as an employee, there are fines associated with not having an I-9 form on record for that worker.

Fines from the U.S. Department of Labor (DOL), IRS, and state agencies can total millions of dollars. Companies can be held responsible for paying back-taxes and interest on employee’s wages as well as FICA taxes that weren’t withheld originally.

Failure to make these payments can result in additional fines.
If the IRS believes you’ve intentionally misclassified workers, there is also the possibility of criminal and civil penalties and sanctions. Additional penalties and fines can be applied depending on the severity of the misclassification.

3. Class-Action Lawsuits

The media today is filled with ongoing class action lawsuits involving large, well-known organizations. These lawsuits can result in huge costs for your company—not only legal costs, but also punitive damages, compensation that goes above and beyond individual or government fines and payments.

When a company is involved in a lawsuit, representatives from legal, HR, marketing, and finance departments will need to assist in finding proper documents, defending claims, and complying with investigations. During this time, these key people generally aren’t able to dedicate as much time to their primary work.

Loss of existing talent is also a potential consequence. Independent professionals may decide to end their relationship with your company or choose to not re-engage with you when their project ends.

Read the full story at 5 Employee Misclassification Penalties to Avoid | MBO Partners

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