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Worker misclassification can cost far more than it saves

On Behalf of | Nov 29, 2022 | Employer Defense

Hiring a new employee means having some responsibilities toward that individual. From employment tax contributions to unemployment insurance and workers’ compensation coverage, there are numerous expenditures that come with bringing new staff members into your company. You also have to train them and will likely have to pay for benefits in addition to their wages.

Some organizations try to minimize new hire liability by selectively classifying some of their workers as independent contractors. An independent contractor is self-employed and works on a project basis, meaning the company has far fewer obligations to the worker.

Some companies are so eager to save money on taxes and insurance requirements, as well as potential overtime wages, that they have workers who are technically employees that they classify as independent contractors. This intentional misclassification can be incredibly expensive, especially here in California.

State and federal law penalize misclassification

There are many issues with the business practice of calling a worker an independent contractor while treating them like an employee. Obviously, the worker doesn’t receive the full benefits of employment, like unemployment insurance, that they deserve. If they get hurt at work, they could become dependent on state benefits when they might otherwise have had workers’ compensation coverage.

Beyond that, the employer avoids tax responsibilities, which can lead to penalties imposed by the Internal Revenue Service. The state of California also imposes penalties for misclassification, up to $25,000 per violation. It can work out to be a very expensive practice, potentially costing companies thousands of dollars per day per employee after the issue comes to light.

Evaluating your employment contracts can protect your business

Some businesses make mistakes that they can later correct. If your business has previously misclassified workers as independent contractors, you could potentially identify and correct those oversights by updating your employment arrangements as necessary. The state provides certain standards to determine whether a worker is an independent contractor or not. The tax forms you had them fill out are less important than the dynamics of the relationship.

Companies with better support on employment matters can more easily remain compliant with the law. Learning more about the possible consequences of seemingly minor employment law mistakes can help companies avoid expensive issues.