Why Employee Misclassification Matters

Why Employee Misclassification Matters

Why Employee Misclassification Matters

In recent years, economic shifts and advancements in technology have led to unprecedented growth in the independent and freelance workforces. It shouldn’t surprise anyone then that companies are turning more and more frequently to independent contractors to fill vacancies that were previously filled by traditional employees. These companies need to exercise caution and follow certain rules when taking on independent contractors, however, as employee misclassification can leave you open to organizational audits and lawsuits.

Employees and Contractors — What’s the Difference?

Employers can find themselves tempted to classify their employees as independent contractors because it frees them from the responsibility of withholding the worker’s payroll taxes. Payroll taxes include things like Social Security, Medicare, and Federal Unemployment that are automatically deducted from W-2 employees.  Independent contractors, however, are responsible for their own payroll taxes.

In theory, this practice splits the tax burden equally between employer and contractor. The fact of the matter is that this isn’t always the case. From 2010 to 2015, the IRS reports that the number of taxpayers penalized for underpaying their estimated taxes rose nearly forty percent. The freelance economy and misclassification caused this rise.

If you’re unsure whether you’ve classified your workers properly, then get in touch with us today for an employment law compliance review. If you know for a fact that you’ve been misclassifying them, don’t worry – we can help with that, too.

Misclassification Can Trigger an Audit

The federal government really doesn’t like misclassification and they’re more than happy to lay down an organizational audit against those that they believe to be less than compliant. These audits often strike unexpectedly and can be debilitatingly expensive in terms of time, energy, and money. In the most extreme situations, employers are hit with fines, criminal penalties and more as a consequence.

The problem starts when you treat your independent contractors like traditional W-2 employees. This looks like you’re trying to avoid paying the IRS. This includes training them on the job, requiring specific hours and/or a set schedule, and requiring them to take on the same responsibilities of actual employees. Most organizational audits are brought about by whistleblower reports, when a contractor files for unemployment benefits, or when a worker files a request for classification determination with form SS-8.

How to Survive Organizational Audits

Notice of an organizational audit by the IRS comes by snail mail. The letter includes the justification for the audit and instructions on what to do next.

No matter the reason for the audit, your first move should be to find and retain a lawyer with experience in tax and labor law. Your lawyer is one of the best allies that you will have through this intimidating process. Having the right counsel makes it easier to gather the necessary information and documents. Their legal training helps them spot instances of employee misclassification that business owners could miss.

Prepare documentation to provide to the auditor. You will likely need to meet with them to review cases or information that they find questionable, too. When it comes to negotiations, don’t worry – that’s what your counsel is for.

Prevention vs. Cure

Audits are a lot like a disease – an ounce of prevention is worth a pound of cure. Regular internal audits of company policies, practices, and records can alert you to any issues before they grow into full-blown problems. Ensure that your internal policies and procedures for classifying your workers are in line with state and federal regulations. Remember, even honest mistakes can lead to audits just as easily as outright violations.

Another critical component to properly classifying your workers is to always use written contracts. These protect your business by defining the individual as a licensed and insured independent contractor. Hold on to any documents that could help you back up your classifications, too. For comprehensive protection, consider hiring a lawyer to assist with drafting your employment and independent contractor agreements.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling 727-279-5037.

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FL Patel Law PLLC is a boutique business law firm dedicated to entrepreneurs and companies.

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