Worker Misclassification: How a Seemingly Simple Mistake Can Cost Your Business Dearly

Understaffing and other employee-related issues have been a major concern for many small and medium-sized businesses in recent years. Many employers have had to make significant changes to their workforces, including outsourcing responsibilities to third parties, expanding remote work, and relying more heavily on independent contractors.

If you own or manage a small or medium-sized business, understanding and complying with state and federal employment laws is essential. Even a seemingly minor mistake can result in massive fines and penalties for worker misclassification.

Independent Contractors Versus Employees

Many businesses work with both independent contractors as well as employees. Employees are typically relied on for ongoing business operations, while contractors provide services on an as-needed basis. However, the lines between the two can sometimes get blurred – especially during challenging times like these.

Every employer should understand when a worker should be classified as an independent contractor and when the worker should be classified as an employee. Consider the following questions when deciding how to classify a worker:

• Is the worker required to comply with specific work hours, or is he or she free to work on his or her own schedule?
• Does the company have direct control over when, where, and how the worker performs his or her job?
• How is the worker paid?
• What types of services does the worker perform? Are these services outside of the business’s normal operations?
• Does the worker buy his or her own supplies and equipment?
• Does the worker have his or her own company, e.g. an LLC?
• Is there a written agreement between the worker and the company?
• Does the worker bill the company in the name of his or her company?

Workers who work independently, outside of the employer’s direct oversight are typically independent contractors. Contractors are generally expected to use their own supplies and equipment to perform the job. They do not work a set schedule and have much more freedom than employees. Contractors are paid a flat rate per each unit of work performed. In most cases, contractors perform work that is not performed by regular employees.

Independent contractors typically sign a written agreement with the employer specifying the terms of their business relationship. Some independent contractors set up an LLC for tax savings and liability protection purposes. The contractor may bill the employer in the name of their company.

On the other hand, employees are generally required to stick to a certain work schedule, receive hourly wages or salaries, and are not expected to use their own equipment or supplies to fulfill their job responsibilities. 

Consequences of Worker Misclassification

Misclassifying workers can lead to significant adverse consequences. When a business hires an employee, income tax, Social Security tax, and other taxes are withheld from the worker’s paycheck. Full-time employees and some part-time employees also receive employment benefits, including health insurance and paid time off.

Businesses that misclassify employees as contractors may be required to pay back taxes as well as fines and penalties. The misclassified employees may be entitled to overtime pay for any hours they worked above 40 hours per week, as well as other damages. 

Contact our Naperville Business Law Attorneys

Proper classification of workers is just one of countless legal concerns employers face. Our Naperville business attorneys provide comprehensive legal guidance regarding employment concerns, buying and selling a business, compliance and regulatory issues, and much more. Call our office today at 630-228-9413 to set up a consultation.

Sources:

https://www.cnn.com/2022/08/19/economy/worker-shortage-small-business/index.html

https://www.irs.gov/newsroom/irs-reminds-business-owners-to-correctly-identify-workers-as-employees-or-independent-contractors