MBO Partners provides excellent guidance for businesses on the misclassification of workers as independent contractors.
Why is Worker Misclassification a Risk?
There are a number of laws, tests, and definitions to help businesses determine whether a worker is an independent contractor or an employee. Unfortunately, these guidelines lack uniformity, are often quite detailed and can be interpreted in various ways. This complicates classification as workers may be seen as employees under one set of tests or from one person’s perspective, but as independent contractors under another.
Correct classification is important because employers do not have to provide common benefits such as health care options, unemployment insurance, or minimum wage to independent contractors. Misclassification stems from the economic and business advantages of using independent contractors, coupled with a grey area of competing legal guidance.
Why Do Companies Misclassify Workers?
When employers misclassify an employee as an independent contractor and avoid contributing to Social Security and Medicare, offering employee benefit plans, or abiding by minimum wage and overtime laws, they can save on labor costs.
Misclassification, however, can have serious consequences including fines, penalties, audits, back-tax payment, negative press, and loss of trust. For example, FedEx cut labor costs by misclassifying drivers as independent contractors, resulting in a $228 million settlement for California drivers. Citigroup has also been faced with a $325,000 settlement for misclassification of technology workers and Zenefits had to pay $3.4 million to misclassified employees for unpaid overtime.
How Can You Reduce the Risk of Misclassification?
Business should audit their current independent contractor classification processes to identify gaps and areas for improvement. By creating guidelines for independent contractor engagement and ensuring enterprise managers and relevant staff enforce policies and procedures, businesses can minimize their exposure to misclassification liability.
Organizations can use existing federal, state, and government agency tests as guidelines to create a questionnaire or checklist to assess worker classification. Keeping supporting documents on file—such as business or professional licenses, marketing materials, personal websites, or insurance certificates—as proof of self-employment is another best practice. It is also incredibly important to use a written contract that clearly defines the business’s working relationship with an independent contractor.
Read the full story at Why the Risk of Misclassification Can’t Be Ignored | MBO Partners