Classify Correctly or Pay the Penalty


Perhaps you’re familiar with the phenomenon known as the ‘gig economy?  The “on-demand economy” is an alternative moniker given to the portion of the United States economy driven by the contribution of contingent workers. If you know them as 1099 employees, pay close attention.

Consider this:  according to Pew Research analysis of Census Bureau data, “self-employed Americans and the workers they hired accounted for 44 million jobs in 2014, or 30% of the national workforce. The self-employed, 14.6 million in all, represented 10% of the nation’s 146 million workers and they in turn provided jobs for 29.4 million other workers.”

With such significant numbers of self-employed laborers in the workforce, it is quite likely one or more of these independent contractors are among the ranks of your organization.

Unlike direct company employees, Independent Contractors (ICs) contract their services to an organization and typically do not receive employer-provided health insurance. Nor might these entrepreneurs have access to government unemployment benefits or workers’ compensation, which are typically available to W-2 employees, when their gig comes to an end.

Simply put, misclassification happens when an employer incorrectly classifies a worker as an independent contractor rather than an employee.  Correctly classifying workers is important across the board, otherwise: workers may be shortchanged benefits to which they are entitled; government entities are denied uncollected revenues that fund essential government programs and employers face serious pecuniary penalties.

The consequences of misclassification can not only be costly due to imposed penalties, but lawsuits may results as well.  Just ask Uber.

Not everyone loses the legal battle, but is it worth the risk?

In Sydney, Australia, Eagle Tours is facing fines up to $51k for each of several laws it may have allegedly breached by misclassifying tour operators as ICs, rather than employees. If that doesn’t seem terribly egregious, how about the 2015 $228M settlement FedEx Ground reached with 2,300 drivers who filed and won a class action lawsuit over misclassification?

Rather than debate whether a new hire is an employee or an IC, following the guidelines in the Internal Revenue Service’s recently updated documentation can help determine the correct classification.

Alternatively, many enterprises turn to trusted business process outsourcing services, such as SDI, to properly classify and monitor small suppliers, independent contractors, and other service providers. Through comprehensive review and analysis SDI ensures workers asserting independent status have all the required documentation to qualify as ICs under government regulations.

Through our comprehensive Small Supplier Compliance Programs, SDI can ensure your organization is not liable for penalties, back taxes, and a tarnished reputation.