Worker misclassification is a potential liability for businesses. Work with an experienced attorney to avoid misclassification and to effectively address issues when they arise.
Worker misclassification: what businesses need to do to avoid liability
One of the areas of liability businesses need to really pay attention to is worker classification. With a variety of workers under different types of contracts and in different working relationships with the business, it isn't always easy to accurately identify and maintain every worker's status.
Getting classification right is important not only in order to avoid penalties and other liabilities, but also to maintain good relations with workers and a good business reputation. Businesses should not only be aware of the criteria used to classify workers, but also the assistance they can receive to comply with the law.
IRS worker classification criteria
The IRS takes an interest in worker classification because employers generally must withhold and pay Social Security and Medicare taxes, as well as unemployment taxes, for employees. These expenses generally do not have to be paid for independent contractors. For business owners, proper classification depends on determining the exact business relationship that exists between a worker and the business.
The degree of control and independence a worker has his or her own work is critical to making a proper classification determination. Control and independence need to be examined from the perspective of the worker's day-to-day activity, the financial aspects of the relationship, and any contracts or agreements which exist between the worker and the business. Considering all these factors, businesses have to make the best determination they can. There is no defined formula. Some factors may dictate in favor of employee classification, while others dictate in favor of independent contractor classification.
Businesses should be able to justify each classification with discrete factors which can be supported by documentation. Businesses which are unclear about proper classification after considering all the facts are able to seek guidance from the IRS, as well.
Compliance assistance through federal, state agencies
The federal Department of Labor and the Colorado Department of Labor and Employment are also charged with overseeing proper classification of workers. Both agencies have a complaint process that workers may use to have a case investigated. Both agencies work together not only to help workers address concerns about misclassification, but also to help employers comply with the law. Businesses can take advantage of this process to avoid liability.
Businesses may, for example, obtain an advisory opinion from the state regarding the classification of specific workers. An advisory opinion must be applied for, and does involve some cost, but it can help a business to avoid potentially penalties for unintended misclassification.
Consequences, penalties, and employer relief
Business accused of misclassifying workers will have to go through an investigation to have the accusations sorted out, and this can be time-consuming and potentially costly. If it is determined that the employer has deliberately misclassified employees, liabilities may include: payback of unemployment insurance premiums with interest; fines; and a prohibition on contracting with the state or receiving funds back from the state.
A business which has misclassified an employee but has a reasonable basis for doing so may be exempted from payment of employment taxes, but it must file the correct documentation with the IRS to receive relief. Partial relief may also be available to employers who have engaged in worker misclassification through a federal settlement program.
Seek help from an experienced business law attorney
Businesses at every stage of development should be concerned about proper worker classification and avoiding liabilities in this area. The best way to get a handle on the matter is to work with experienced legal counsel to put in place a thorough compliance program to manage worker classification issues proactively.
Keywords: worker misclassification, employment litigation, employer liability