Is Your Workforce Properly Classified? How to Avoid Penalties

Correctly classifying workers is crucial to avoid legal and financial pitfalls.

Worker Misclassification

Properly classifying those who do work for you is perhaps one of the most important decisions you can make as a business owner.

In an effort to save money and headaches, you may be tempted to hire someone as an independent contractor. Is your relationship with them really that of an independent contractor? It’s a great alternative for an employee. After all, you aren’t responsible for filing taxes or providing benefits to independent contractors.

Ironically, those who are trying to save money and headaches seem to get themselves into trouble and end up losing more money. Misclassification of your labor force as independent contractors when they are actually employees can lead to owing additional wages, benefits, taxes, and unemployment contributions for those workers. It can also create severe and costly penalties, including:

$50 to $1,000 per day per worker and/or six months in jail per violation
additional penalty of 25% of what the State has been defrauded
failure to provide workers’ compensation liability is a class A misdemeanor and also punishable with a civil penalty of three times the annual premium the employer would have paid or up to $50,000

The seriousness is real, yet the US Department of Labor estimates 30 percent of companies nationwide misclassify their employees. The above content was taken from the pamphlet titled Are you OFF THE BOOKS? provided by the Missouri Division of Employment Security.

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Independent Contractor vs. W-2 Employee

Independent contractors and employees are not the same. Knowing the distinction will help you determine what your first move when hiring will be, or if you are compliant with your current hiring practices including the benefits being provided. It will also determine your liability to pay and withhold Federal Income tax, social security and Medicare taxes, and Federal unemployment tax, and workers’ compensation to avoid costly legal consequences.

Ultimately, rules hold that workers’ status as an employee or independent contractor hinges on your right to control the worker. If your worker performs services for wages and you can control what, when, and how it will be done, then consider them an employee. Here are some potential differences between an employee and an independent contractor:

An employee:

Performs duties dictated or controlled by others
Is given training for work to be done
Has a particular permanency of relationship with employer
Is eligible for employee benefits

An Independent Contractor:

Operates under a business name
Has his/her own employees
Maintains a separate business checking account
Advertises his/her business’ services
Invoices for work completed
Has more than one client
Has his/her own tools and sets own hours
Keeps business records
Is not eligible for employee benefits

Missouri uses the Classifying Employees for Unemployment Tax Purposes – Information for Employers (PDF) which can be found on the Missouri Department of Labor website. This resource will help you determine the legal status of classification.

At our law firm, we are here to assist business owners with the review and preparation of their agreements and setting up the proper legal structure for their businesses.

Please call our office at (888) 887-4170 if you have any questions about this article.