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How to avoid employee misclassification

Updated on :

March 15, 2024
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How to avoid employee misclassification

Misclassification of employees is a common problem in many organizations, frequently resulting in significant legal, financial, and reputational repercussions. It is essential to correctly classify employees to ensure that they receive the appropriate benefits and protections under federal and state law. This article will provide an overview of employee classification, examine common causes of misclassification, and provide solutions on how to avoid employee misclassification.

What is employee misclassification?

Employee misclassification occurs when an employer classifies a worker as an independent contractor rather than a full-time employee. Due to misclassification, employees may be denied benefits and legal protections. Understanding the distinction between the two categories is crucial to avoid employees being misclassified as independent contractors.

Learn more on misclassification and its risks here.

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Differences between full-time employees and independent contractors

Full-time employees

Full-time employees are entitled to benefits, such as health insurance, paid time off, retirement plans, and other advantages, and work a set number of hours per week. Additionally, they are protected by various labor laws, and their employer is responsible for withholding taxes from their pay. In summary, full-time employees;

  • Receive a salary or an hourly wage.
  • Withhold taxes from their pay.
  • Benefit eligibility includes health insurance, paid leave, and retirement plans.
  • Are safeguarded by labor laws.

Independent contractors

Independent contractors provide services to various clients on a contractual basis. They are responsible for their taxes and are not entitled to health insurance, paid time off, or workers' compensation benefits. Independent contractors are 

  • In business for themselves; 
  • Paid on a per-project or per-task basis; 
  • Responsible for their taxes, insurance, and benefits; 
  • Not protected by many employment regulations, such as minimum wage and overtime regulations

Discover the pros and cons of independent contractors and full-time employees here.

How to tell if employees are misclassified

To determine whether an employee has been incorrectly classified, employers must consider the following factors:

  • The level of control the employer has over the tasks, schedule, and methodologies of the employee's job performance.
  • The worker's financial investment in their work, such as tools, equipment, and training. 
  • The worker's potential for profit or loss is due to their efforts.
  • The permanence of the worker's relationship with the employer.
  • A worker is presumably an employee if they depend economically on the employer. If they operate their own business, they are likely an independent contractor.

Common causes for misclassification

Misclassification of employees can occur for a variety of reasons, often originating from misunderstandings or a failure to comprehend the classification criteria. The following are frequent causes of misclassification:

  • Employers may not wholly comprehend the nuances of federal, state, and industry-specific classification criteria, resulting in the misclassification of employees. For example, an employer may erroneously assume that if a worker has a signed contract as an independent contractor, they are automatically classified as such, disregarding other factors such as the employer's level of control over the worker's activities.
  • Some employers may intentionally misclassify employees as independent contractors in order to save money on payroll taxes, employee benefits, and other costs. This can be especially alluring for small businesses seeking to cut costs, but the long-term consequences of misclassification can far outweigh any short-term savings. Learn more on global payroll compliance here.
  • Employers may be oblivious of the significance of proper classification and the potential repercussions of misclassification. This issue can be exacerbated by a lack of education and training in HR departments, leading to unintentional misclassification.
  • In certain instances, the nature of a worker's job duties and responsibilities may not neatly fall into a particular classification. This ambiguity can lead to confusion and misclassification of employees, mainly if the employer does not take the time to analyze the job duties thoroughly and consult applicable guidelines.

How to avoid misclassification of employees

Employers can implement the following strategies to minimize the risk of employee misclassification and ensure compliance with federal and state regulations:

Conduct comprehensive job analysis

Employers should conduct thorough job analyses for each position in order to determine the correct classification. Examining job duties, responsibilities, and the level of control, the employer has over the employee's activities. The results of these analyses should be recorded and reviewed regularly to ensure continued compliance.

Review employment agreements and contracts

Employers should thoroughly review and revise employment contracts and agreements to accurately reflect the worker's classification, job responsibilities, and duties. This can help provide clarity for both the employer and employee and serve as a point of reference in disputes or audits.

Create transparent hiring and onboarding procedures

Employers should establish consistent recruiting and onboarding procedures that include the correct classification of new employees. This includes explicitly communicating the worker's classification during the recruitment process, providing onboarding materials tailored to the worker's classification, and setting expectations regarding benefits, taxes, and other classification-related aspects.

Consult legal and HR professionals

Employers should consult legal and HR professionals regularly to ensure continued compliance with federal, state, and industry-specific classification regulations. These experts can guide proper classification, aid in resolving ambiguous situations, and assist with revising company policies and procedures as necessary.

Partner with a Record Employer (EOR).

A third-party organization that manages employment and payroll compliance for employees on behalf of the employer. Employers can mitigate the risk of misclassification by partnering with an EOR, as the EOR will ensure that employees are properly classified and compensated in accordance with applicable laws and regulations. This is especially advantageous for small enterprises and organizations with complex employment arrangements.

Ensure full global compliance with Skuad

Employee misclassification can lead to serious legal and financial consequences for both employers and workers. Employers must be diligent in classifying their workers correctly based on the nature of the working relationship and the applicable labor laws. By partnering with a reputed Employer of Record like Skuad, you can navigate the process of avoiding employee misclassification easily.

Skuad’s global employment and payroll platform enables you to hire and onboard contractors and employees in over 160 countries compliantly. With Skuad you do not have to worry about legal risks and fines as Skuad ensures your organization is fully compliant with country-specific laws and regulations. Skuad can help you establish compliance as part of your corporate identity without the hassles.

To know more about Skuad, talk to Skuad experts today.

FAQs

What is an example of employee misclassification?

An example of employee misclassification is when a worker is wrongly classified as an independent contractor, thereby missing out on benefits and legal protections that should be provided due to the incorrect misclassification as an independent contractor instead of an employee.

What can happen to the employer and worker if a worker is not correctly classified?

When an employer incorrectly classifies a worker as an independent contractor, they may face fines or penalties depending on the severity of the case.

About the author

Sandeep Patel is a Content Marketing Manager and Strategist. Over the last five years, he has created and managed content for global brands and fintech startups. He is passionate about remote work and using tech for a better work-life balance.

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