“Misclassification” Demystified

Misclassification is a rampant issue according to the United State’s Department of Labor. Learn how federal and state labor laws protect workers – and when they don’t – as well as why misclassification affects everyone.

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What is misclassification?

According to the Department of Labor’s brand new landing page, “misclassification refers to a worker who is an employee under the law but is incorrectly classified as something other than an employee (usually an independent contractor).”

 

Why is employee misclassification an issue?

The Department of Labor, and federal and state laws protect workers who meet the legal definition of an “employee” in specific ways. Employers may deliberately misclassify these employees in an attempt to cut costs, instead labeling them independent contractors, freelancers, etc. When this misclassiciation happens, it affects everyone. According to the DOL, “businesses found to have misclassified their workers expose themselves to fines and liability for unpaid wages and unpaid taxes.” Businesses have attempted to gain an “unfair advantage by unlawfully lowering their personnel costs” like not paying legal minimum wages, not offering benefits, or not providing safety and other equipment required for their jobs. When this happens, governments “lose revenue, which in turn hurts taxpayers and undermines the economy” of the United States. The problem is so rampant that the DOL created a brand-new landing page dedicated to demystifying misclassification, providing solutions to employers.

 

What is an example of a benefit that has been withheld from employees incorrectly labelled as independent contractors?

In addition to being paid minimum wage and overtime pay, these misclassified individuals may be blocked access to protections from anti-discrimination and anti-retaliation laws, workers compensation laws, unemployment insurance, and employer-sponsored benefits like health insurance and life insurance. Plus, when incorrectly classified it could cost the employee double the Social Security tax.

 

How can employers ensure they are classifying employees correctly?

Check out this helpful PDF from the IRS which explains the differences between independent contractors and employees, including how it changes federal income tax, social security and Medicare taxes, and how you file your tax return.