It’s perfectly acceptable for companies to rely on independent contractors to supplement their staff and get the work done. However, what’s not acceptable is the misclassification of employees as independent contractors to cut costs. Unfortunately, up to 30% of employers end up misclassifying workers.
What Are the Penalties for Misclassifying Employees as Independent Contractors?
Wage Law Violations
Two construction companies in Massachusetts faced $2,360,000 in fines for intentionally misclassifying more than 400 employees in 2016. Furthermore, Servant’s Quest, a company that provides at-home healthcare services for the ill and the elderly, was misclassifying 50 workers in 2021. They had to pay $358,675 back wages due to unpaid overtime hours.
Under the federal Fair Labor Standards Act (FLSA) and applicable state wage laws, employers will be held liable for failure to pay overtime and minimum wage. The statute of limitations for a wage claim under the FLSA for a non-willful violation is two years. Moreover, it’s three years for a breach in which employers knowingly violated the law or were lax in understanding and complying with the legal requirements. Some states go back as far as four years.
It’s important to note that the DOL added auditors to ensure businesses aren’t misclassifying workers as independent contractors. Employers and executives who violate the law may incur heavy penalties, such as unpaid overtime costs and minimum wage deficits. Liquidated damages and attorney’s fees may equal these costs. In some states, officers may be held personally liable for a penalty.
Tax Issues
Penalties may be imposed on employers who neglect to withhold state and federal payroll taxes and make matching Social Security and Medicare tax payments.
Improper Exclusion from Benefit Plans
Misclassified independent contractors are potentially entitled to their company’s employee benefit plans, including health insurance, paid leave, pension, other retirement plans, and severance pay. Improper exclusion from benefit plans has the potential for tremendous liability because this subject is a hot enforcement area.
Unemployment Insurance Shortfalls
Employers who fail to pay the appropriate amount of money to the state unemployment insurance funds may incur penalties that can be retroactive. This problem typically happens when the employer submits the Employer’s Quarterly Wage List and Employer’s Contribution Report without accurately reporting the number of employees. It’s worth noting that the contribution rate is based on these reports.
WARN Act Violations
The Commissioner of Labor enforces penalties under the State WARN Act against companies that fail to file WARN notices to affected misclassified employees in the event of mass layoffs and plant closings. Besides providing for a civil penalty of $500 per day of violation, this Act holds employers liable for back pay and other benefits for 60 days of the violation.
Worker’s Compensation Violations
Penalties for violating state worker’s compensation insurance laws and liability for unpaid workers’ compensation premiums may be levied. Furthermore, failure to provide coverage may cost between $500 and $5,000 per violation. Willful violations are punishable by a fine between $1,000 and $10,000 or up to a year of jail time.
FMLA Act Violations
The Family Medical Leave Act (FMLA) allows eligible employees of covered employers to take unpaid and job-protected leave for qualified medical and family reasons. Employers who fail to provide leave and reinstatement to eligible employees may be penalized based on how the violation negatively impacted the wronged employee.
Avoid the Cost of Misclassification of Employees as Independent Contractors!
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