Q: What are the penalties for misclassifying employees?

-Concerned CEO

A: Dear Concerned:

Hiring independent contractors (ICs) can be a great way to save on labor costs and avoid the HR hassles that come with traditional employees. But misclassifying workers, even unintentionally, can lead to serious consequences, which could potentially destroy your business.

In today’s “gig” economy, employers face heightened scrutiny from regulatory agencies at all levels, which has led to a dramatic increase in the number of businesses being penalized for misclassification. Given this, properly classifying your workers is more important than ever.

If you misclassify an employee as an IC, you face hefty fines from the U.S. Department of Labor, the IRS, and state agencies. You can also be responsible for paying back taxes and interest on employee wages that weren’t originally withheld.

Additionally, you can be held liable for failing to pay overtime and minimum wage under the Federal Fair Labor Standards Act as well as under state laws. And if the IRS believes your misclassification was intentional, you could even face criminal penalties.

With such severe penalties, you should do everything you can to ensure your workers are classified correctly. Fortunately, with the proper legal guidance, it’s easy to stay totally compliant.

Whether you need help reviewing your worker classification practices, want advice on your state’s employment laws, or would like support in creating airtight IC agreements, contact a Family Business Lawyer™ for trusted guidance.