The Impact of Employee Misclassification on Your Business

By MBO Partners | February 10, 2021

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The Impact of Employee Misclassification on Your Business

Many organizations today incorporate independent professional talent into their fulltime workforce. But whether your business has been engaging independent contractors for years or is just beginning use independent talent, it is increasingly important to put measures in place to help correctly classify talent as either traditional employees—recipients of a W-2 Wage and Tax Statement—or independent contractors—recipients of form 1099-MISC, Miscellaneous Income.

Failure to correctly classify a worker can have long-term, expensive consequences. If a person you engage does not fully qualify as a 1099 independent contractor as defined by the IRS and any applicable state laws, your business can be held financially responsible for any subsequent fines and penalties. Below, we explore the impact of employee misclassification and some of the potential costs of worker misclassification that are important to keep in mind when engaging independent contractors.

1. Financial Penalties as a Result of an Audit

The risk of being audited for worker misclassification has increased in the past few years with growing awareness of independent worker rights, more news coverage of high-profile misclassification lawsuits, and a growing conversation around how to interpret worker classification laws.

If an IRS audit finds that a company is treating independent contractors like traditional W-2 employees, the audit can lead to large fines, back tax payment owed, and potential lawsuits. No company is immune to audits, no matter their industry or size.

To minimize the risk of an audit it is first helpful to make sure that current classification practices are compliant. If your company does not already have a centralized program for independent contractor engagement, it is important to begin building one. A centralized program will help to consistently enforce policies that will help your company remain compliant and correctly engage independent workers.

2. Class-Action Lawsuits

Class-action lawsuits can drag on for years and result in large, ongoing costs. Not only are legal fees involved, but your company may end up owing punitive damages beyond individual or government fines and payments.

Lawsuits can also be costly from a workforce standpoint. When employees from various departments such as HR, legal, marketing, and finance take time to comply with investigations it takes away from their primary work responsibilities. Independent contractors may also view a company as an unfavorable choice in client partnership if they have been involved in a misclassification lawsuit.

3. Negative Publicity and Press

A big lawsuit that is covered by the press can quickly lead to negative publicity and reputation damage. Employees may not want to attach their name to a brand that has been involved in a well-known lawsuit, customers may begin to mistrust the company, and other businesses who may have been potential partners or investors down the road may choose to go a different direction.

Correctly classifying workers is not a straightforward task. MBO Partners has extensive experience in helping enterprises compliantly engage independent talent. Contact us today to learn how you can avoid costly misclassification issues.

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