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Question:
Our company uses a lot of independent contractors. I’m worried that some of these independent contractors are actually misclassified and should be employees. What are the risks if they are misclassified, and what should we do?
Answer:
You are not alone in worrying about misclassification. As businesses evolve and roles change, it’s not uncommon for independent contractors to start performing duties that resemble those of employees.
The risk of misclassifying employees as independent contractors can be significant. Your company could owe back wages, overtime pay, unpaid payroll taxes and penalties. Additionally, misclassified contractors might claim they were entitle to employee benefits, such as health insurance, retirement contributions, and paid leave. These penalties can be costly and crippling to a new companies.
What should you do?
Conduct an Internal Audit
Review the roles and responsibilities of all independent contractors.
Compare their work against legal classification standards like the IRS’s 20-factor test, the DOL’s economic realities test, or your state’s specific criteria.
Many factors include control (who sets the schedule, provides equipment, manages contractor, etc.) and economic reality (are you the contractor's only client or do they serve other clients as well).
https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship
Have legal conduct the final review to ensure compliance.
Reassess Your Contracts
Ensure your agreements clearly outline the independent contractor relationship.
Avoid language that suggests control over the worker's day-to-day tasks, hours, or performance standards.
Have legal review all contracts and agreements.
Reclassify Workers Where Necessary
If you find misclassification, reclassify affected contractors as employees.
This transition may include offering employment agreements, onboarding them as W-2 employees, and providing necessary benefits.
Consult Legal and HR Experts
Seek advice from employment law attorneys to ensure compliance with federal and state laws.
Proactively addressing misclassification issues can minimize penalties and demonstrate good faith in compliance efforts.
Final Thoughts:
Misclassification can be costly, but taking proactive steps to address it can save your company from significant legal and financial consequences. By conducting an audit, aligning practices with legal standards, and seeking expert guidance, you can protect your business and foster trust within your workforce.
More questions? Write jball@peaklegaltraining.com
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Disclaimer:
This post is for informational purposes only and does not constitute legal advice. Employment classification laws vary by state and jurisdiction and are subject to change. For advice tailored to your specific circumstances, we strongly recommend consulting a qualified attorney or legal professional. Taking proactive steps now can help mitigate risks and ensure compliance, but only a legal expert can provide guidance that aligns with your unique situation.