Importance of classifying employees

What is Employee Misclassification?

Occasionally companies try to save money by avoiding payroll taxes, workers’ compensation and unemployment insurance costs, or employee benefits. Sometimes a business will try to do this through the act of deliberate Employee Misclassification. Businesses may falsely classify their employees as independent contractors, or they may intentionally misreport the actual job description. An example would be reporting warehouse workers as office clerical workers.

As it relates to workers’ compensation insurance, Employee Misclassification is often done to obtain a lower premium. When a business misclassifies employees to reduce its worker’s compensation costs, it negatively impacts its insurance carrier. Although insurers diligently attempt to identify and stop fraud, some cases may inevitably go undiscovered. This could lead to higher costs which could result in higher premiums for all policyholders.

Not only is it illegal, but misclassifying employees also harms the individual workers as well as the general public. Misclassified workers may not be eligible for certain benefits, such as minimum wage protections, family and medical leave, workers’ compensation or unemployment insurance or health care coverage. The public is harmed through the loss of tax revenues that support Social Security and Medicare.

It is important to know how to correctly classify a worker as either an employee or a contractor. The Internal Revenue Service defines an independent contractor as someone who is self-employed. Independent contractors become employees if they perform services that are controlled by an employer, including what specific work will be done and how the work will be accomplished.

If you have any questions about how to classify your workforce, consult with your human resources representative or a qualified employment attorney.