The misclassification of freelancers has emerged as one of the biggest storylines within the booming gig economy. As we’ve all seen from the onslaught on seemingly endless lawsuits, the cost of non-compliance can be staggering.
Fines levied by the U.S. Department of Labor (DOL), IRS and state agencies for worker misclassification can exceed millions depending on the severity of the infractions. As more and more companies begin leveraging independent contractors, it’s paramount that they arm themselves with the tools, processes and information needed to mitigate their compliance risk.
The following list of compliance risks, while certainly not exhaustive, highlights the critical need for companies to take proper steps to ensure their contractors and employees are properly classified.
1. Tax Trouble
Penalties may be levied for failing to withhold state and federal payroll taxes, including failure to make matching social security and Medicare tax payments.
2. I-9 Violations
Employers may be held liable for failure to comply with federal I-9 requirements. Employers are obligated to keep properly filled-out I-9s for each of its employees, including common law employees who are determined to have been misclassified as independent contractors. Industries such as construction, home health care, warehousing and poultry processing are often under greater scrutiny for compliance.
3. Wage Law Violations
Employers will be held liable for failure to pay overtime and minimum wage under the federal Fair Labor Standards Act (FLSA) and applicable state wage laws. The statute of limitations for a wage claim under the FLSA is two years for a non-willful violation and three years for a willful violation (“willful” means the employer was knowingly violating the law, or was lax in properly understanding and complying with its legal obligations).
Both criminal penalties and liability for back wages may be levied against employers and executives found in violation of FLSA laws. This is an area of intense focus by the DOL and auditors have been added just to ensure that employees are not violating the law in classifying workers as independent contractors.
The potential liability exposure for companies that misclassify employees is huge. Employers found in violation may incur massive penalties, including unpaid overtime costs and minimum wage deficits – costs that may be equaled by liquidated damages and attorney fees.
4. Unemployment Insurance Shortfalls
Added risks include penalties for failure to pay the appropriate amount of money to the state unemployment insurance funds, which can be retroactive. The issue is typically whether the Employer’s Quarterly Wage List and Employer’s Contribution Report submitted to Workforce Services accurately report the number of employees, because these are the reports the contribution rate is based upon.
5. Improper Exclusion from Benefit Plans
Misclassified independent contractors are potentially entitled to coverage under the company’s employee benefit plans, including pension and other retirement plans, health insurance, paid leave, severance pay, etc. This is also a very hot enforcement area, the subject of a number of lawsuits and has the potential for tremendous liability.
The Cost of Noncompliance
The consequences of improper classification, whether intentional or not, can be staggering. Take the example of a small business that was forced to pay thousands in back taxes; Lowe’s, which was forced to pay a $10 million settlement; or even the high-profile dispute between FedEx and its drivers, which led to the company agreeing on a whopping $228 million settlement.
The bottom line? You can’t afford to misclassify. Without complete visibility into their freelance engagements, businesses run the risk of improperly classifying workers and leaving themselves exposed to crippling financial penalties. Invest in the technology and tools needed to mitigate your compliance risk and err on the side of caution.