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Why Does Worker Misclassification Matter? How Can You Reduce This Hiring Risk?

Why Does Worker Misclassification Matter_ How Can You Reduce This Hiring Risk_

Using independent contractors (IC) makes good business sense. Among the many benefits, use of independent contractors can free professional staff for mission-critical responsibilities and enable short-term use of specialized resources, which may not be available normally.

Many businesses choose to classify certain workers as ICs rather than employees to:

  • Avoid payroll-related administrative costs
  • Avoid fringe benefit obligations
  • Avoid a higher headcount
  • Avoid employment taxes
  • Avoid worker’s compensation liabilities & costs
  • Avoid unionization
  • Avoid paying overtime compensation
  • Establish a short-term, readily terminable relationship with workers.

However, IC arrangements are coming under increased scrutiny by state and federal government agencies and are subject of a growing number of class action lawsuits.

Employers looking to remain compliant with their workforce have all sorts of risks to assess. If you’re utilizing Independent Contractors as any part of your workforce, you need to make sure that you’ve classified them correctly on your end.

The U.S. Department of Labor has provided a list of common myths for job seekers to have as a resource.  It can be found here.  While this isn’t a guide for employers,  it is good to keep these points in mind.

  • January 2021 the Department of Labor announced a final rule clarifying the standard for employee versus independent contractor. Effective date of the final rule is March 8, 2021.

Here is a good employer facing chart from the DOL to help determine if someone is an employee or Independent Contractor

Is Your Company in Compliance?

What is Worker Misclassification?

Typically this comes down to how an employee is reported for pay and tax purposes.  An employer may classify a worker as an independent contractor while the government thinks they should be  classified as an employee.

  • Employee misclassification is defined as the practice of labeling workers as independent contractors, rather than employees.
  • This practice allows employers to avoid paying payroll and other taxes on employees, and to avoid covering them on workers compensation and unemployment insurance.

What are the Risks Associated with Misclassifying Employees?

The risks can include fines, settlements stemming, to paying back taxes. If a business has been misclassifying employees for years, this can have a significant impact on their ability to do business.

  • Penalties for non-compliance vary depending on whether or not the DOL and the IRS determine that the misclassification was unintentional, employers face at least the following penalties based on all payment to misclassified workers that have been re-classed as wages.

Misclassifying individuals as an IC may be exposing the organization to substantial liability under various state and federal laws. In addition, some states have imposed new penalties for misclassification of employees.

Improperly structuring and managing the relationship between the company and its ICs, may unwittingly expose the organization to potential legal and financial risk.

Misclassifying employees opens employers up to a world of trouble and misclassification penalties.  Misclassification means the state and federal government lose out on payroll and tax revenue.  They don’t like this.

Fines and Back Payments

In cases where misclassification is deemed unintentional

  • A $50 fee for each Form W-2 that was not filed
  • 1.5% of the employee’s wages, plus interest
  • 40% of the employee’s FICA (Social Security and Medicare) contributions
  • 100% of the employer’s matching FICA contribution

If the DOL suspects that misclassification was intentional

  • 20% of all employee wages paid
  • 100% of FICA contributions for both employee and employer
  • Up to $1,000 in criminal penalties per misclassified employee
  • Up to 1 year in prison

Tarnished Reputation

In addition, to a myriad of fees, fines, audits, and class action lawsuits stemming from misclassification it can also damage your  organization’s reputation.  It can put your company in the public eye, which can lead to negative publicity.

The individual responsible for the misclassification can also be held personally accountable.

How Do You Avoid Misclassifying Your Employees?

Misclassification is a serious issue impacting employers, employees and financial implications. The best practice is to document your processes on the topics and utilize the expertise of trusted legal counsel.  You can also leverage an Employer of Record provider that can take on this liability. Having a compliance program in place can guard against the legal and tax risks associated with employee misclassification.

IRS 20-Factor Independent Contractor Test

  • The IRS doesn’t use the exact 20-Factor test anymore. However, they still use the principles behind it to decide whether or not a company’s workers are employees or ICs.
  • It is critical that businesses correctly determine whether the individuals providing services are employees or independent contractors.
  • Generally, corporations must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.
  • Corporations do not generally have to withhold or pay any taxes on payment to independent contractors.

Are Your Business Practices Putting You at Risk?

  Ask yourself the following questions:

  • Behavioral – Does the company control the location and work hours for the job?
  • Financial – Does the company require the employee to use its equipment and tools?
  • Type of Relationship – Does the employee have any specified time off or benefits? Will the employee only conduct work for your organization during this calendar year (meaning they will have no other clients)

If you answer yes to any of these questions, your worker is probably an employee and not an independent contractor!

Panther Can Help

We’ve been helping companies for the last 30 years manage their workforces with accuracy and in compliance. In some of our workforce arrangements we become the employer of record, assuming the risks associated with that. Over the years we’ve consulted with many companies to bring them into compliance.

Benefits of Engaging The Panther Group?

Outsource the risk of non-compliance with tax and employment laws since you will not be the employer of record for misclassified employees.

  1. This Saves You Time
  2. Increase efficiencies
  3. Ensures compliant hiring practices
  4. More manageable vetting process
  5. Develop a company-wide contracting policy
  6. It will document the compliance in the event of an audit by tax authorities or other regulators

The Panther Group’s Independent Contractor Compliance (ICC) Program Mitigates Risks

If you’re looking to make sure that you’re in compliance and save time and money in the process, we’d love to consult with you to see if we’re a good fit for your situation and goals.  With the significant changes to our economy, workforce demographics and new challenges on the horizon, it’s that much more important to stay in compliance and we can help!

Why Choose Panther For Your Workforce Needs?

As experts in human capital, The Panther Group provides more than staffing and recruitment services.  We provide workforce management services that afford our clients true flexibility and clarity into their workforce strategy. With over 30 years of experience as experts in human capital, Panther delivers superior service delivery for our clients, including strategies to adapt to all hiring environments, in local and national markets.

Whether your needs are temporary or permanent, one placement or a full team, our recruiting experts will design a solution that helps you achieve your strategic goals.

Our Staffing and Recruitment Disciplines Include: Professional & AdministrativeAccounting & Finance, Engineering & ManufacturingInformation TechnologyLife SciencesCustomer Service, and Federal.

We Serve Industries Including the Following: Aerospace & Defense, Financial Services, Higher Education, Media, Telecom, Government & Non-Profits, Healthcare & Insurance, and Consumer Products.

We Also Provide Workforce Management Solutions Including: Managed Service Provider (MSP) Vendor on Premise (VOP), Recruitment Process Outsourcing (RPO), and Payrolling.

We’ve put together an eBook chock full of data and insights for creating a deep and effective company culture.  You can download your free copy here.

If you’re looking to bring your staffing and recruitment strategy to the next level, we’d love to offer a conversation to see if we’d be a good match.  Our reputation is extremely strong with both candidates and our clients and we’d love to bring that to bear in a potential partnership with you. Please feel free to fill out our contact form to initiate a simple and low-pressure conversation with our team.

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