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22 Jun 2017
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By Maslow
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Blog

3 Employee Misclassification Penalties You Don’t Want to Mess With

The use of independent contractors has increased exponentially over the last decade, with a bustling gig economy expected to compose 40 percent of the American workforce within the next four years.

Because of this, awareness of independent worker rights is growing, too, as are the inevitable liabilities resulting from employee misclassification.

The differences between an employee and an independent contractor largely involve compensation and control. An independent contractor will incur unreimbursed business expenses throughout the course of his or her work. He or she will likely have invested significant funds for the equipment used, is able to make his or her services available to others, and is typically paid a flat fee. Employees do none of these things.

Regardless, many employers misclassify employees as independent contractors for monetary reasons. By doing so, they avoid paying for taxes, overtime, benefits, unemployment, and workers’ compensation.

They also open themselves up to a world of trouble and employee misclassification penalties.

Occasionally, however, misclassification is a result of a simple error or misunderstanding.

Employees who believe they have been misrepresented can file a complaint with the DOL or the state labor agency. Misclassification means the state and federal government lose out on payroll and tax revenue. They don’t like this. To demonstrate their discontent, the following employee misclassification penalties could be levied:

1. FINES AND BACK PAYMENTS

In cases where misclassification is deemed unintentional, an employer may be charged the following:

  • A $50 fee for each 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 contributions

And that’s just if an employer didn’t mean it.

If the DOL suspects that misclassification was intentional, however, an employer can be charged the following:

  • 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

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

2. BENEFITS

A misclassified employee who files a complaint may be eligible for benefits owed to them, including, but not limited to:

  • 401(k) contributions
  • Health and welfare coverage
  • Stock options
  • Overtime
  • Paid Time Off and break time

3. TARNISHED REPUTATION

In addition to myriad fees and fines, audits and class action lawsuits stemming from misclassification can drag a company into the spotlight, resulting in bad publicity and an irrevocably damaged rep.

A lawsuit, alone, can cripple a company with legal costs, punitive damages, compensation beyond fines and back payments, and lost employee time.

In short, employee misclassification can cost employers a great deal, often due to simple mistakes or a misinterpretation of tax rules and regulations. Avoid unnecessary employee misclassification penalties. Maslow Media Group has the answers to important questions regarding payroll, contractors, compliance, and more.

Contact us today to learn more.

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Written by Maslow