When employers are filing their tax documentation, it is estimated the federal government loses millions because of employee misclassification. The tax situation and insurance requirements will vary depending on the number of employees your company claims, and by inadvertently or purposefully labeling employees as independent contractors, your company can avoid certainly required coverages. However, when consulting with the team at Axis Insurance Services, there are dangers when classifying your employees incorrectly.
- If an employee has been misclassified, the company may be violating state and federal employment, tax, and wage laws. Your company can be fined for failing to provide overtime or minimum wages established under the FLSA. Claims can be made up to three years after the infraction.
- If employees have been misclassified, an audit can reveal a lack of payments toward payroll taxes and Medicare or Social Security taxes. Federal and local governments can apply fees for failing to pay these taxes.
- When an employee receives the wrong classification, a denial of benefits or a lack of payment into federal entities like Social Security can result in a lawsuit. If it has happened to more than one individual, a more costly class-action lawsuit can ensue. This creates financial repercussions that include punitive damages, rebranding, retroactive compensation settlements, and fines or penalties.
Carefully going through your HR files can help verify the accuracy of your classification. Consider establishing a special department to work with managing individual contractors.