What Is Employee Misclassification?

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Misclassification of Employees As Independent Contractors

Independent contractor misclassification is an illegal but little-known practice used by unscrupulous employers to underpay workers. Often, the impact of employee misclassification can have devastating implications for U.S. workers who are attempting to earn an honest wage. This form of wage theft is a blight that many pay for but only a few benefit from.  

What Does Employee Misclassification Mean?

Independent contractor misclassification is the illegal practice of employers falsely identifying their workers as independent contractors instead of employees. This practice gives employers the ability to avoid paying taxes on their workers, like FICA taxes, social security, workers’ compensation, and unemployment insurance.

Independent contractor misclassification benefits the employer in the short-term but has long-standing negative effects for workers as well as federal and local governments that get shortchanged on tax revenue. So, what is independent contractor misclassification, how does it work exactly, and who does it affect? 

Who Is Harmed By Independent Contractor Misclassification?

It may look like independent contractor misclassification merely puts more revenue in the pocket of an employer. But, this illegal practice has reverberating consequences felt by an employee’s family all the way to Capitol Hill. Not to mention, employee misclassification is a form of tax evasion and carries with it legal consequences including prison time.

What Are Employee Classifications?

Defining whether a worker is an employee or an independent contractor can be complicated. Many state and federal laws are dedicated to identifying the difference between the two. Boiled down, there are several criteria vital to figuring out whether a worker is a taxed employee or not.

Independent Contractors

The definition of what an independent contractor is varies slightly from state to state. Most importantly, it is the responsibility of an employer to prove that an employee is an independent contractor, not the other way around. 

In order to deem a worker an independent contractor, under the so-called “ABC” test which is used in states like California and Massachusetts, an employer must prove all of the following:

  • The worker is free from control or direction over services performed.
  • The service provided is outside the normal scope of services offered, or performed away from the worker’s business location. 
  • The worker is “customarily engaged in an independently established trade, occupation, profession or business.”

Other states use the more complicated “economic realities test,” which weighs more factors in order to determine whether a worker is truly an independent contractor who is in business for themselves. 

Taxed Employee

If an employer has the right to control labor in any fashion, or is able to exercise behavioral and financial control over a worker, that worker most likely should be classified as an employee. Factors leading to an employee designation include “the amount of direction provided over the means and results of the work, the possibility of profit or loss for the worker, and whether the worker is free to provide similar services to other businesses.”

How Does It Benefit Employers to Misclassify Employees?

According to the National Conference of State Legislatures, “It’s estimated that a business can save 30 percent of their labor costs by using independent contractors rather than employees.”

Employers practicing employee misclassification have an opportunity to avoid a large portion of overhead costs, gaining an unfair but significant advantage over their competitors. Unfortunately, this practice skews the market in favor of companies that attempt to game the system. It also holds negative ramifications for the lives of employees and their families, who are cheated out of employee benefits, like paid vacation and sick time, health insurance, social security, and diminished earnings. 

How Misclassification Impacts Employees

Lost Wages

If a worker is considered an independent contractor instead of an employee, they are responsible for paying their own income and self-employment taxes. This can become a large burden for a worker unfamiliar with self-employment provisions of state and federal tax codes and regulations. If an employee underpays their taxes at the end of the year, they may be penalized by the IRS and their state taxing authorities, resulting in lost wages. 

Misclassified employees are also illegally deprived of statutory minimum wages and overtime premium pay, furthering the economic harm of the practice.

Loss of Benefits

When a worker is labeled an independent contractor, they’re expected to pay for their own medical insurance. Since the employer isn’t putting any of the company’s revenue into tax buckets intended to fully or partially pay for an employee’s health benefits, the employee is left with a large monthly or quarterly bill, if they can afford it.  

Private medical and dental insurance is costly. If a worker isn’t able to pay the expensive health insurance premiums for themselves and their family, they’re left uninsured and at risk for even costlier medical bills.   

Other Impacts

Employee misclassification impacts the state and federal governments by depriving them of tax revenue. Programs like Social Security, Medicare, and other services that are intended for the public’s benefit are negatively affected. Private citizens, as a result, are deprived of government resources that could otherwise lift them from the brink of financial disaster or worse.

Have You Been Misclassified?

If you suspect you’ve been misclassified as an independent contractor, you’re protected by law from employer retaliation. Workers, therefore, should be vigilant and proactive when confronting employee misclassification and report to the proper authorities.

If your employer is found liable for independent contractor misclassification, they face severe monetary penalties, and damages payable to you up to a possible 200 percent of wages owed. Here’s what you can do if you’ve been unjustly misclassified. 

If You’ve Been Misclassified, Contact the Employee Misclassification Lawyers at We Stop Wage Theft

We Stop Wage Theft is dedicated to giving workers the resources, knowledge, and support necessary to fight back against wage theft like employee misclassification. Contact us – after a confidential and free case review, we’ll connect you with a legal team dedicated to seeking justice in your misclassification case. 

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