What Is Employee Misclassification And The Risks Associated With It?

Misclassification of employees concludes that a particular employee has not been classified correctly under the law by government regulators like the tax authorities or courts. That frequently happens when employees have been hired either under a “contract for service” or without an actual contract in existence. Such workers in the US may be referred to as freelancers or independent contractors rather than employees.

An employee is misclassified when a company treats them as an independent contractor for tax and legal reasons when they are an employee. According to a recent study, almost 10% to 30% of firms in the US may be misclassifying their employees which is creating a loss to the US tax authorities for billions in unpaid taxes.

Why should Employee Misclassification be reported to the authorities?

Read on to have a better understanding of what is misclassification of employees.

  • Governments are deprived of the tax revenue to which they are legally entitled when employees are misclassified.
  • Several eligible deductions for employees may be written off by independent contractors from their gross income.
  • Employees are denied access to mandatory benefits like pensions and required health insurance which increases the burden on the State.
  • Employees are deprived of the worker protection rights provided by employment law.

Avoiding Misclassification of Employee

Misclassification of an employee involves too many risks and practical steps should be taken to avoid such a situation.

  • Hiring workers from a Professional Employer Organization (PEO) so that all employee benefits are provided, payroll taxes are paid and any misclassification can be prevented.
  • Ensuring that the Employment Contracts are drafted professionally.
  • A company should have a policy that applies to everyone and spells out how each employee is to be treated.

Misclassification of employees poses serious threats to both the employer and the employee as Inaccurate worker classification could result in substantial back taxes, fines, or damages.

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