Consequences of Misclassifying an Employee

It’s important to know the difference between employees and contractors to avoid misclassifying them. Treating a contractor as an employee without the burden of offering them benefits, providing workers’ compensation or paying certain state and federal taxes can lead to costly lawsuits.

Differences between employees and contractors

There are several qualifications under California law that explain the difference between employees and contractors. A worker is an employee if they:

  • Receive workers’ compensation for workplace injuries
  • Are eligible for unemployment compensation upon termination
  • Have income tax, social security tax and medicare tax withheld by the employer
  • Are covered by wage and hour laws

Contractors, on the other hand, aren’t eligible for these benefits. They are also required to work independently or with little guidance from the employer.

Problems arise when employers treat a contractor as an employee by assigning them the same responsibilities and privileges as employees. This might include allowing contractors to participate in meetings and events that would integrate them into its company culture and initiatives. To avoid treating contractors like employees, employers can:

  • Keep contractor and employee teams separate
  • Assign contractors a separate supervisor
  • Give employees job responsibilities with different functions that are more integral to the business’ success
  • Exclude contractors from team-building events and incentives
  • Invite contractors only to trainings and meetings that meet their specific job function

How misclassification can affect your company

The Internal Revenue Service (IRS) and Department of Labor (DOL) don’t take misclassification cases lightly. If a worker feels their employer has misclassified them, your business may face serious penalties, including:

  • Fines
  • Compensation payments to workers
  • Loss of company reputation

By consulting with an employment law attorney, you can get an understanding of what policies your business can put in place to avoid and defend against a misclassification claim.

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