What Happens if an Employee is Misclassified as an Independent Contractor?

There are many potential liabilities employers face if an employee is misclassified as an independent contractor. They come from several sources: namely, the IRS, unemployment insurance, workers’ compensation, federal wage and hour law, and state wage and hour law.

An employer will owe up to three years of back taxes on the misclassified employee’s wages, in addition to fines and interest. They will also owe back unemployment and workers’ compensation insurance. And they may also owe premiums on other state-run insurance programs, such as paid family leave.

In addition to money owed to government entities, employers will also owe misclassified workers two to three years of back pay for any work they did that was not compensated at applicable minimum wage and overtime rates, as well as liquidated (extra) damages equal to that amount. Finally, in states that have their own minimum wage, overtime, or employee classification laws, the employee will likely to be able to sue and recover under both state and federal law. There may also be hefty attorney fees on top of the costs described above.

Through misclassification, employers may also be denying workers of certain employee benefits (e.g. overtime and the federal Family Medical Leave Act). In fact, a Cornell University study had estimated the average unemployment insurance taxable wages that was left underreported due to employers misclassifying workers as independent contractors were $4.28 billion for the state of New York alone.

It doesn’t matter much if an employer misclassified someone by mistake. Under certain laws, willfulness will increase the potential damages from two years of back pay to three, and lead to higher statutory penalties. But most of the laws at play in misclassification and wage and hour cases are strict liability statutes, meaning it makes no difference that the employer didn’t mean to do it incorrectly.

Want to ensure you are in compliance with wage and labor laws? Partner with the payroll and HR experts at GTM. Request a free quote today to see how we handle the hassles and let you focus on growing your business.