For household employers, worker classification refers to whether a worker is classified as an employee vs. independent contractor for federal and state employment tax purposes. It is very important that an employer knows the difference between the two, so that both parties’ taxes are filed properly and you can avoid the penalties for misclassifying your domestic worker.
The cost of misclassification will depend on several factors, such as how many employees are misclassified, how much extra money they would have been paid if properly classified, how the misclassification is discovered, and how your employees react to it.
Generally, if an employee goes to the federal Department of Labor and says they have been misclassified, the DOL will likely investigate. Any employee who the DOL determines should have been paid overtime in the last two years will be found to have been underpaid, and the employer will owe that money to the employee now (or three years’ worth if the misclassification is found to be “willful”). The employer will also owe them liquidated damages equal to the amount of money owed. So, if an employee should have been paid $2,000 in overtime, the employer will owe them $4,000. The employer will also owe taxes on those wages and interest on those taxes.
Additionally, many states have their own overtime laws, and in most cases the employer can be held liable under both federal and state law, meaning not only would the employee be owed double under the FLSA, but also any liquidated damages under state law (which could easily triple the original amount). And if you are in a state with late payment penalties, you could owe up to 30 days’ worth of the employee’s pay on top of the already discussed damages. There’s also a very good chance that the employer will be held liable for any related attorney’s fees – both your own and the employee’s.
Finally, there are potential federal civil penalties of $1,894 per violation (generally one penalty per misclassified employee), state penalties (which will vary), and in some cases the potential for jail time. As soon as judgment is rendered in favor of the employee, statutory interest will begin to accrue on the amount owed – generally 10% per year.
As you can see, the costs associated with misclassification are steep. Download our Independent Contractor Checklist to ensure that you are properly classifying your domestic worker so you can avoid any of the penalties listed above. Contact us for more information at (800) 929-9213.