“Employee misclassification” refers to the practice by an employer of improperly classifying employees as independent contractors to escape any legal obligations under state labor, employment, and tax laws, without restriction, the laws governing lowest wage, overtime, severance pay, workers’ compensation insurance, temporary disability insurance, wage payment, and payroll levies.

Governments and authorities are particularly concerned about the misclassification of employees as independent contractors because it causes significant losses in tax revenue and benefits to the social security and welfare systems. When a worker is incorrectly categorized as an independent contractor, neither taxes nor social security benefits are withheld by the employer, or rather the entity who contracts the worker. This is done so that independent contractors can pay their taxes and contribute to their social security benefits.

Penalties 

• Negative publicity for the business that misclassified its employees.
• Severance pays and other benefits if the employee is terminated and retroactively asserts his or her rights as an employee.
• Obligation to repay taxes and social security over several years.
• Financial Penalty

Tips To Avoid It

• Businesses that use contract workers must be aware of the rules that apply to employee classification. The Fair Labor Standards Act (FLSA) governs employee classification in the US.
• Doing an internal audit of your current classification program and processes will help to ensure that your independent contractors are classified correctly. And now is the perfect opportunity to create any official program or procedures you do not already have in place.
• Every contractor you hire must have a properly drafted contractor agreement in place, describing precisely what services the contractor is furnishing and laying out the terms of their relationship with you, even if you’ve worked with someone for several occasions without any issues using a verbal agreement.
• Consider establishing a program for independent contractor involvement to stay biddable and reduce your threat. This program will assist you in finding, enlisting, and managing contingent workers legally.

In today’s growing economy, using contractors might give your business an advantage, but if you’re not careful, they can also be a big problem.