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HCMWorks Insights

Misclassification Lawsuits: 3 Tips on How to Avoid Them

Posted by Mark Liebenthal on 19 Oct 2015

The United States Department of Labor has teamed up with other government bodies, such as the IRS, to crack down on the rampant issue of worker misclassification. If you are misclassifying employees either unwittingly or purposely as independent contractors and are caught, you will have to pay back tax withholdings, social security and Medicare contributions, and unemployment insurance premiums. This can amount to a significant sum of money.

But the bigger expense that can occur if a misclassification has been clarified will come in the form of employee or former employee lawsuits. You may have to pay millions in a settlement for class-action misclassification lawsuits. The cost might include the reimbursement of legal fees and retirement funds as well as benefit package reimbursement, overtime compensation, the reimbursement of expenses, and more.

Misclassification lawsuits can sink your business. In order to avoid being hit with them, use these three tips.

1. Don’t Treat Your Independent Contractors like Employees

One of the most common ways business owners accidentally cross the line into misclassification is by treating their contractors like their employees. They include contactors in their incentive competitions, give them the same working hours, pay them hourly, provide them with instructions, training and all of the equipment and tools they need to do their duties, give them access to the company gym, have behavioral control over how they do their work, etc.

It’s critical that you draw a line between the two types of workers at your company. Do not blend them together as the same workforce or you could get hit with misclassification lawsuits. The IRS and DOL will look at each and every one of these factors and more to make a determination for misclassification. Though no one factor will make or break the determination, the totality of the way you treat and manage your contingent workers will be taken into consideration. So be careful. Reduce your risk of misclassification lawsuits by treating your independent contractors differently from your employees.

2. Seek Out the Services of a Managed Services Provider

Properly classifying your workers can be complex. Often, they’ll fall into a gray area where they could potentially be classified as both employees and independent contractors based on the various legal tests available. It’s in your best interest to ensure proper classification to avoid misclassification lawsuits. One way to do so is to hand off the responsibility to a managed services provider.

The services provider will have the facts, understand the nuanced factors in classification, and know what the federal government looks for while making a determination. A managed services provider can make the call for you by evaluating and analyzing the business relationship between employer and worker. These providers have systems in place to ensure correct classification. If your organization utilizes a large contingent workforce, you should seek out the services of a managed services provider to take over the management of your independent contractors, including their classification. This business move will significantly reduce your risks and liabilities as well as the potential costs associated with misclassification lawsuits as well as government fines and penalties.

3. Consider Leasing Your Independent Contractors

Hiring your independent contractors through a leasing company can provide you with a degree of protection against misclassification lawsuits. Of course, hiring them through an agency will come at a greater cost, but the benefit of reduced risk may be worth the cost. Make sure that all employment negotiations made go through the leasing agent rather than the actual worker, so that you are not viewed as a joint employer by the IRS, and thus, jointly responsible for the risks.

Stay Compliant

When you follow these three steps, you can reduce the risk of worker misclassification and the lawsuits that come with it. Manage your independent contractors different from your employees, work with a managed services provider, or use the services of a leasing agency to stay compliant.

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Tags: Independent Contractors

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