The Dangers of Contractor Misclassification

The Dangers of Contractor MisclassificationUtilizing independent contractors can provide an organization with access to highly-skilled and talented workers while offering staffing flexibility and cost savings. The benefits of independent contractors are certainly attractive to employers, but the risk of misclassification presents some dangers too. Misclassifying employees as contractors is a serious mistake that can have costly consequences including civil penalties, class action lawsuits, back taxes, fines, and more.

What is an independent contractor?

In order to determine whether or not an employee should be classified as an independent contractor, certain questions must be asked. These guidelines have been established by previous employment misclassification cases and have been used in courts to determine eligibility of employees.

  • Does the employer control the business aspect of the worker’s job? (Tools and expenses, etc)
  • Are there employee benefits provided to the worker, like pension or healthcare?
  • Will the employer continue the relationship with the employee after their current project is completed?
  • Does the employer control how/when the job is done by the worker?

If the answer to any of these questions is yes, it’s likely that the worker should be classified as an employee rather than an independent contractor. According to the United States Government Accountability Office, up to 30% of audited organizations had unintentionally misclassified at least some employees. Regardless of intention, when a misclassification is found, the employer is held responsible for the mistake and faces – at minimum – the following penalties and fines:

  • $50 for each unfiled Form W-2.
  • Penalties of 1.5% of the wages, plus 40% of the FICA taxes (Social Security and Medicare) that were not withheld, as well as 100% of the matching FICA taxes the employer should have paid. Interest is also accrued on these penalties daily.
  • A Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.

If a misclassification is found to be intentional, the governing agencies involved can impose additional fines and penalties, including criminal penalties of up to $1,000 per misclassified worker, the full amount of taxes not withheld, or even time in prison.

In today’s overly litigious society, employers who misclassify contractors are often subject to wage claims and class-action lawsuits that further the financial damages of their mistake. Employers should always err on the side of caution and consult an expert when determining how to classify employees, but mistakes happen. In order to ensure your employer clients are properly protected from costly employment lawsuits and wage claims, check to make sure that employment practices liability insurance (EPLI) is offered within your agency’s commercial lines insurance programs.

About Mavon Insurance

At Mavon Insurance, we pride ourselves on our unique approach to insurance. We focus on integrity, communication, professionalism, respect and gratitude to help our clients succeed and place business in specialized markets. For more information about our products or to become an agent, please contact us today at (855) 248-1480.