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The Importance Of Proper Employee Classification: Avoiding Missteps In Wage And Hour Compliance

Hiring committee greeting a potential new hire.

According to the Economic Policy Institute (EPI), almost a third of employers misclassify employees at some point. Numerous errors frequently arise when it comes to misclassifying individuals as either employees or independent contractors, and vice versa. Businesses that take the time to ensure their staff obtain the benefits and pay owed by assigning correct worker categorizations are less likely to encounter legal trouble. Discover why correct employee classification is vital to wage and hour compliance and explore the legal options available to employers by getting in touch with an experienced New York employer defense attorney from Schwab & Gasparini via their Syracuse site at (315) 422-1333, their Albany office at (518) 591-4664, or their Hudson Valley or White Plains locations at (914) 304-4353. 

Employee Classification Explained

Employee classification refers to categorizing an organization’s staff members, especially concerning tax obligations and pay schedules. Some businesses also utilize this system to determine which individuals are eligible for specific employee benefits, such as paid leave or employer-subsidized health insurance. They might place individuals into further subcategories if there are extra-legal considerations to think about (such as when a company in the United States employs both citizens and non-citizens). 

To more effectively manage their firms, employers could additionally split employees into distinct groups based on their organizational roles to meet particular company requirements. An example is subdividing staff by pay frequency, executive status, or title. In sum, organizations categorize employees for a wide array of compliance and administrative purposes.

Why Is It Important To Classify Employees Correctly?

Improperly classifying staff members might substantially affect their compensation, benefits, and other expenses, particularly if there is a mix-up regarding who is a part-time vs. full-time employee or if an employee is mistakenly assigned independent contractor status. The expenses often skirted by incorrect employee categorization include the following examples:

  • Overtime
  • Minimum wage
  • Medicare taxes and social security
  • Employee benefits, such as paid holidays
  • Compensation insurance for workers
  • Unemployment compensation tax

Regardless of whether employee misclassification occurred as part of a deliberate attempt to avoid legal costs and requirements or because of an honest error, such an offense could severely harm businesses. Irregularities in employee classification may trigger audits by state and federal tax authorities and can leave a business vulnerable to lawsuits from misclassified workers who have missed out on benefits to which they were entitled.

Why Is It Important for an Employer To Classify a Worker as an Employee or an Independent Contractor?

Accurately categorizing workers as either independent contractors or employees holds significant importance for businesses. This determination dictates whether the employer is responsible for paying and withholding payroll taxes. The chief consideration for utilizing a particular classification is whether the employer has the right to control or direct a staff member’s workload; if they have this right, the individual is likely an employee.

To aid employers with making these determinations, the Internal Revenue Service (IRS) offers the following assistance:

  • They shared the 20-point checklist used by its auditors to resolve this categorization issue.
  • The IRS also has a safe haven directive, which enables businesses to treat workers as non-employees for tax purposes—irrespective of an individual’s actual worker status—in specific circumstances.
  • Finally, a company can ask the IRS to determine the status of one of its workers if they are still determining the classification.

Learn more about employee classification, including how employers can ensure compliance, and how a seasoned New York employer defense lawyer from Schwab & Gasparini can assist organizations by arranging a consultation today.

What Is the Improper Classification of Employees?

Also known as independent contractor or worker misclassification, misclassifying employees is an illegal act. Categorizing staff members as independent contractors even though they are technically employees prevents them from receiving specific worker benefits and protections to which they are entitled. Improperly classifying employees can lead to the following issues:

  • Worker exploitation: In the United States, the Fair Labor Standards Act (FLSA) specifies that every hiring organization should offer their employees workers’ compensation, unemployment insurance, and healthcare benefits. This part of the act does not apply to contractors. Organizations that misclassify employees as independent contractors to avoid awarding these benefits leave themselves open to various legal actions.
  • Unfair competition: The labor expenses associated with independent contractors are usually significantly lower than those involved in maintaining staff on payroll because employers do not have to offer compulsory benefits or offer the company’s proportion of payroll taxes. If a company misclassifies a worker as a contractor, it obtains an unfair advantage over those firms that pay the required taxes and provide appropriate benefits, such as paid leave and retirement contributions, to hired employees. 
  • Tax revenue losses: Employers that classify staff members as contractors are not required to withhold company earnings when making local tax contributions. Misclassification results in avoiding such taxation, which, per Jobs With Justice, amounts to billions of lost public tax revenue every year.

What Are the Two Things That Can Happen if There Is a Misclassification of a Worker?

Incorrectly classifying an employee as an independent contractor can lead to various adverse consequences for the employer and the company. In general, an organization in this scenario could expect any of the following consequences:

  • Financial ramifications: While the exact amounts vary depending on how severe the situation is and the extent of wrong categorizations found throughout an organization, the financial penalties issued for worker misclassification can be hefty. Such financial consequences could include back taxes, the recovery of unpaid wages related to hours worked, extra penalties for not deducting and withholding taxes linked to misclassified staff members, and possible punitive damages resulting from tax and unpaid wage lawsuits.
  • Frequent audits: Another notable drawback refers to the potentiality of further, more regular audits. A business often gets penalized in the first place due to an audit from an organization like the Department of Labor (DOL) or the Occupational Safety and Health Administration (OSHA). If caught, these organizations flag the employer as a possible repeat offender, meaning they are likely to experience audits at a later date to make sure they stay compliant.

Contact a New York Employer Defense Attorney Today

The laws related to classifying employees are updated periodically to reflect how people work, making this a complex legal area, particularly now that remote work has become popular. Although making the necessary assessments can take time and effort, properly categorizing employees reduces an organization’s chances of violating labor laws. Ensuring compliance in this area may also help companies optimize their workflow by attracting a diverse mix of temporary workers, employees, freelancers, and consultants, many of whom seek a flexible work environment. Reach out to Schwab & Gasparini to gain a more comprehensive understanding of employee classification from a New York employer defense attorney and get help with your company’s legal concerns by calling the firm’s Albany office at (518) 591-4664, White Plains, or Hudson Valley offices at (914) 304-4353, or Syracuse location at (315) 422-1333.


Tue Dec 12 2023, 12:00am