Consequences of Misclassifying a Worker
The consequences of incorrectly classifying a worker as an independent contractor are primarily financial.
Financial costs can be imposed by the Federal Government, the State Government, by the worker (often in class action lawsuits) or by all of them. The most significant costs:
1. If the Feds go after the corporation, the company would be liable for:
None of these amounts may be collected from the worker.
2. If the State goes after the corporation, the company would be liable for:
None of these amounts may be collected from the worker.
3. If the worker sues (typically as a class-action lawsuit) the lawsuit usually includes the following claims:
In theory, the corporation and/or the particular managers can also be held criminally liable for misclassifying the individual. Most of the wage hour laws make various violations a misdemeanor although it is very rare for anyone to be criminally charged. And, of course, in all of these situations, whether civil or criminal, the corporation will incur large litigation defense costs.
Financial costs can be imposed by the Federal Government, the State Government, by the worker (often in class action lawsuits) or by all of them. The most significant costs:
1. If the Feds go after the corporation, the company would be liable for:
- Fines (can be up to 100% of the employment tax due, depending on level of culpability)
- All federal income tax not withheld
- All social security taxes not withheld
- Unemployment insurance tax of 6.2%
None of these amounts may be collected from the worker.
2. If the State goes after the corporation, the company would be liable for:
- Fines
- All state income tax not withheld
- All unemployment insurance tax not paid, plus a 10% fine, plus interest
- All disability insurance tax not paid, plus a fine 10%, plus interest
- A penalty of $10,000 for failure to provide workers' comp insurance coverage
None of these amounts may be collected from the worker.
3. If the worker sues (typically as a class-action lawsuit) the lawsuit usually includes the following claims:
- Any overtime owed (and because the corporation did not maintain time records, the worker’s records would be used to calculate the overtime). This may be calculated as work in excess of 8 hours in a day, or 40 hours in a week, or both.
- Failure to provide the required meal break and rest periods; minimum penalty of 1.5 hours of pay. Of course, if this will often result in the employee having worked over 8 hours in a day, then overtime has to be added.
- Tort liability for any work-related injuries suffered by the employee; plus 10% added on to any worker's comp award, plus attorney's fees related to the tort liability.
- Creative plaintiff’s attorneys can also add claims for unfair business practices under some State statutes, claims for the worker’s incurred medical costs (due to the corporation’s failure to provide health insurance), and related claims based on the corporation’s failure to provide various fringe benefits.
- The worker’s attorney's fees for bringing the lawsuit.
In theory, the corporation and/or the particular managers can also be held criminally liable for misclassifying the individual. Most of the wage hour laws make various violations a misdemeanor although it is very rare for anyone to be criminally charged. And, of course, in all of these situations, whether civil or criminal, the corporation will incur large litigation defense costs.
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