Worker Classification: 5 Reasons Companies Can’t Ignore Compliance Rules

With the rise of the shared economy, workplace compliance issues are surfacing at an alarming rate. Uber and similar enterprises have been at the forefront of news on the subject of late, but the IRS is expanding its attention. And when the IRS pays more attention to this topic, companies need to do the same or risk costly, damaging, and time-consuming consequences.

Here are five reasons you can’t ignore the rules:

  1. Because the government isn’t ignoring it:

For years, government regulations have been lax, leading to the equivalent of a jaywalker’s attitude among businesses. The thought being that it’s okay to ignore the unnecessarily-restrictive law as long as you look both ways.

But as independent contractors rise in prevalence, the financial stakes for the government get higher. In response, government agencies have been ramping up their focus on the subject, not ratcheting down.

According to this white paper, in addition to the Internal Revenue Service (IRS) and U.S. Department of Labor’s attention to the matter, state task forces have been formed to “crack down on businesses that do not pay unemployment insurance and workers’ compensation premiums or that withhold taxes for workers whom states claim to be employees and not independent contractors.”

  1. Consequences are Expensive

There’s big money at stake. In addition to potential back pay for benefits, you’re looking at a per employee fine and potential legal fees, too. FedEx knows: They just shelled out $228 million in a mislabeling case. You can ask Microsoft who paid $97 million, plus millions in legal fees in a benefits dispute with its long-term temps, too. And most recently, there’s Uber which just lost in a dispute over whether drivers were independent contractors (as Uber said) or employees (as the law determined).

  1. Here come the lawyers

Where the money goes, the lawyers follow.

According to the same source, it’s not just the government in the game, “Class action lawyers continue to target some of those same types of companies, seeking unpaid employee benefits, expenses and overtime for workers who are not treated as employees.”

Just when you thought government scrutiny was driving you crazy enough.

  1. Because “We didn’t mean to” doesn’t hold up in court

When you knowingly misclassify employees as independent contractors, it’s called wage theft. When you do it accidentally, it’s called wage theft.

Yes, the rules are confusing. And like many things government, oh what a tangled web the federal and state laws weave. Some laws are interpreted differently from state to state and some tests used to determine status are subjective.

But there are some consistent contributing factors. For 20 relevant factors in considering status (straight from the horse’s mouth), see the IRS’s Present Law and Background Relating to Worker Classification for Federal Tax Purposes. It’s a good place to start.

  1. Consequences to Credibility

In addition to the financial burdens and time-sucking nature of it all, your credibility is on the line. Getting audited is a PR nightmare and depending on the industry or nature of the client company’s business, the press would love to expose a company’s misclassification and actual or perceived abuse of labor laws.

Getting the government, lawyers, and media on your case is a guaranteed trifecta of pain.

It can be overwhelming, but even the chief misclassification enforcement officer of the federal government (Dr. David Weil, Administrator of the Labor Department’s Wage and Hour Division) recognizes there is a legitimate place for independent contractors, sayingthe use of independent contractors [is] not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy.”

The best way to stay in the clear is to stay in the know. So get smart and there’s no need to burn your W9s and run for the hills.

See our intro post for a nutshell version of what worker classification is and why it matters to the IRS.

Need more?

Worker Classification: What’s the Problem And Why Should You Care?

Classifying Employees and Independent Contractors (A Cheat Sheet/Resource List)

About PayReel:

PayReel’s clients, who are some of the biggest companies in the world, are constantly immersed in the chaos of producing multimedia content or executing live events. PayReel makes sure they have the right contractors at the right time in the right place, and that everyone gets paid properly. And, most importantly, they handle every last detail perfectly while making sure their clients think nothing of it, so they can get back to doing what they do best.

Worker Classification: What’s the Problem And Why Should You Care?

Employee misclassification (noun):

  1. The kiss of death for companies.

See also: Number one on the IRS’s list of least favorite things.

The National Conference of State Legislatures provides an alternative description here: “Employee misclassification is the practice of labeling workers as independent contractors, rather than employees.”

As the shared economy blossoms and remote work becomes the new normal, independent contractors are on the rise. This is great for businesses and certainly for workers, too.

Businesses like using independent contractors because they’re affordable (no need to pay for health insurance, 401Ks, and other benefits) and they can hire à la carte  for just the services they need, whenever they need them. Likewise, many workers prefer the autonomy of contracting, including flexibility in their schedules and the ability to work with a variety of companies on a variety of projects.

For the same reasons though, the IRS finds the rising trend troublesome. For employees, businesses are equipped to make sure they stay in line with labor laws, benefits, worker’s comp, unemployment insurance, and of course, tax withholding. Independent contractors, on the other hand, can operate in the wild, wild west of legal lands. They may or may not pay taxes properly, they may overstate their deductions, and they are just harder to keep tabs on (all of which are among the IRS’s least favorite things).  

There are legitimate independent contractors and businesses who employ them properly, but misclassifying an employee as an independent contractor can be incredibly damaging, costly, and time consuming. Just ask Uber and FedEx.

If you haven’t paid attention to it yet, it’s time.

Need more?

Worker Classification: What’s the Problem And Why Should You Care?

Worker Classification: Five Reasons Small Businesses Can’t Ignore Compliance Rules

Classifying Employees and Independent Contractors (A Cheat Sheet/Resource List)

About PayReel:

PayReel’s clients, who are some of the biggest companies in the world, are constantly immersed in the chaos of producing multimedia content or executing live events. PayReel makes sure they have the right contractors at the right time in the right place, and that everyone gets paid properly. And, most importantly, they handle every last detail perfectly while making sure their clients think nothing of it, so they can get back to doing what they do best.