The Cost of Misclassification: Businesses

rising costs

MBO Partners shares information on the cost of misclassifying workers as independent contractors.

The Cost of Misclassification on Businesses

Problem

There are a number of laws, tests, and definitions to help businesses determine whether a worker is an independent contractor or an employee. Unfortunately, these guidelines lack uniformity, are often quite detailed, and can be interpreted in various ways. This complicates classification as workers may be seen as employees under one set of tests or from one person’s perspective, but as independent contractors under another.

Correct classification is important because employers do not have to provide common benefits such as health care options, unemployment insurance, or minimum wage to independent contractors. Misclassification stems from the economic and business advantages of using independent contractors, coupled with a grey area of competing legal guidance.

Reality

When employers misclassify an employee as an independent contractor and avoid contributing to Social Security and Medicare, offering employee benefit plans, or abiding by minimum wage and overtime laws, they can save between 20 to 40% on labor costs.

Misclassification, however, can have serious consequences including fines, penalties, audits, back-tax payment, negative press, and loss of trust. For example, FedEx cut labor costs by misclassifying drivers as independent contractors, resulting in a $228 millionsettlement for California drivers. This year, we’ve already seen Citigroup’s $325,000settlement for misclassification of technology workers and Zenefits’ $3.4 million payment to misclassified employees for unpaid overtime.

Solution

Business should audit their current independent contractor classification processes to identify gaps and areas for improvement. By creating guidelines for independent contractor engagement and ensuring resource managers and relevant staff enforce policies and procedures, businesses can minimize their exposure to misclassification liability.

Read the full story at The Cost of Misclassification: Businesses | MBO Partners

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