Keeping an employee may be costly for some businesses, especially small and medium enterprises. This may lead to cost-cutting measures to keep the business going. Yet doing so through calling employees contractors is dangerous. The underlying intention is to cut on payroll tax, but it only leads to further spending on fees and penalties.
What such companies may be accused of is employee misclassification. It is when employers knowingly misclassify their employees as contractors to avoid tax responsibilities and relieve the tax burden.
The problem behind this move is that the employer basically excuses themselves from proper worker protection. Instead of offering a dependent worker benefits of employment, they don’t provide necessary benefits that workers are in fact entitled to — namely, overtime pay, health benefits, insurance, etc.
Worker misclassification entails several serious violations that can be summarized as follows:
- Tax Implications. Failing to pay employer taxes (e.g. Social Secutiry) and employee tax (e.g. income tax) can result in criminal charges, such as tax fraud, for both parties. A top-level consequence is economic downturns triggered by lesser amounts of money collected through tax.
- Labor Law Violations. Misclassified employees may be denied protections under labor laws, including minimum wage, overtime pay, and government-imposed safety standards.
- Benefits Violations. Employees may be deprived of benefits typically provided to employees, such as health insurance, paid time off, workers' compensation, and retirement benefits.
- Unemployment Insurance Violations. Employers do not contribute to unemployment benefits for misclassified workers.
Ultimately, employees are bound to face severe legal consequences for worker misclassification. These may include:
- Mandatory payment of back wages, including overtime pay
- Penalties and assessments for payroll taxes
- Workers' compensation premiums and penalties
- Compensation for benefits, leave entitlements, and associated penalties
A recent high-profile case is the legal battle between Uber and California. In 2020, the California Labor Commissioner’s Office sued Uber, claiming they had misclassified their drivers as contractors instead of employees, resulting in unpaid wages and benefits.
The lawsuit demanded unpaid taxes, penalties, and damages amounting to millions. It was settled in 2022, with Uber agreeing to pay $ 8.43 million, an average of $ 8,000 per driver.
This settlement was one of the largest ever in a misclassification case and emphasizes the risks employers take when incorrectly categorizing workers as contractors. It has also impacted the gig economy and worker classification practices, with many companies facing increased scrutiny after this ruling.