What are the Risks of Misclassifying Independent Contractors?
We cover everything you need to know, to compliantly engage Independent Contractors in the US.
With great risk, comes great reward…
But, it pays to know the risks of misclassifying independent contractors first… before the reward.
Mature and more complex US legislation vs UK
Classification tests vary on state and federal level
Misclassification in US can lead to penalties
Worker Classification in the US
On a federal level, proper classification is crucial for both Internal Revenue Service (IRS) and Department of Labor (DOL) compliance.
Everyone is a W2 employee, unless proved otherwise via assessments
Which can often be the reason some businesses fall into the risk of misclassifying independent contractors. In the US, the IRS and DOL take the compliance stance that everyone is a W-2 employee, unless you can prove otherwise through a robust assessment.
This assessment takes into consideration both federal law and the law of the state that the worker is completing the work in.
Avoid the risks of misclassifying independent contractors
The IRS has two main concerns:
1) To ensure that US employees are protected and given their entitled benefits and rights.
2) To ensure where applicable that workers are taxed at source and therefore regulated. This is to stem the potential loss of tax revenue.
Limit the risks and count on us
What do you need to know?
The DOL is Concerned About Fair Wages for US Workers
It is important that an individual is properly classified as an Independent Contractor or an employee under the DOL’s Fair Labor Standards Act.
This act creates wage protections including minimum wage and overtime obligations for employees.
The US continues to crack down on contractor misclassification
The US DOL continues to crack down on contractor misclassification, further validated by a proposed new rule.
This rule will likely require more US workers to be classified as employees rather than independent contractors. It’s more important than ever to get contractor classification correct.
Don’t get caught up in the complexities, chat to an expert
Risks of Misclassifying Independent Contractors
All parties in the contractor supply chain are responsible for correct classification
In the UK for IR35, each party carries its own responsibilities (i.e. status determination or fee payer). Whereas, in the US all parties in the contractor supply chain are responsible and carry equal liability in the following areas:
Correct Worker Classification
In accordance to federal and state law
Correct Worker Taxation
At federal, state, and local levels
Employment Benefits Access
When deemed an employee
Entitled Payment
Compliant to federal and state minimum wage and overtime laws.
All parties in the contractor supply chain are eligible for misclassification damages
If a US worker is found to have been misclassified as an independent contractor when they should have been a W2 employee, then all parties:
Would be named and called to present defences as part of any IRS or DOL investigations.
Would be named and called to present defences should the investigation escalate to a court case or if a misclassification lawsuit is brought against any party within the contractor supply chain.
Could have their entire book of business opened and scrutinized under an audit.
Consequences if a US Worker is Misclassified
Below are some of the many consequences if an employee is misclassified as an independent contractor in the US. Make sure you use a compliant assessment tool to minimize your risks.
You will owe backdated payments
If a worker is found to have been misclassified as an independent contractor when they should have been a W2 employee, damages will be sought from all parties in the contractor supply chain to cover:
Backdated federal, state and local taxes
Backdated employment benefits that the employee/s should have been provided from day one such as monthly medical healthcare contributions and paid sick leave.
Back wages for overtime denied by misclassification as an independent contractor.
Risk of financial and criminal penalties
In addition to the damages above, financial penalties, and even criminal penalties, may be imposed on the parties within the contractual supply chain which vary depending on the negligence evidenced.
Think about your reputation
Perhaps the greatest risk of all is the impact of damage to your brand and business not only in the US recruitment industry but also the industry of your target clients for misclassifying workers.
Engage Independent Contractors compliantly
Avoid the risks of misclassifying independent contractors in the US, and enfage W-2 engagements first.
But, if you do have a requirement, we have a new AOR solution available at the best rate in the market that empowers you to compliantly engage independent contractors. You’ll be able to:
Gain access to a market leading worker classification tool, so you can remain compliant.
Ability to place workers deemed independent contractors in any of the 50 states
Get the most out of your US deals – IC payment processing is available at an incredibly low fee of just 1.5%.
Remember, with great risk comes great reward, so click that button below to view the full features and to register your interest in engaging independent contractors through PGC.