Skip to content

Employee Misclassification: A Costly Risk

Employee misclassification is often unintentional but can cause severe damage to a company’s finances and employer brand. A recent survey conducted by PWC confirms that compliance and regulatory risks pose the biggest threat to a business’s ability to grow. 

With more companies relying on contingent workers in the current economy, maintaining compliance is an even more immediate executive imperative. And the changes to legislation that result from every election makes it even more difficult. 

Understanding Employee Misclassification

Usually, a business’s workforce includes –

Employees – Workers that are part of the company’s payroll; filing and paying certain taxes is the employer’s responsibility. These workers are entitled to additional mandatory benefits and legal employee protection.

Contingent workers – The portion of a workforce composed of freelancers, independent contractors, consultants, and temporary workers. These workers are not a part of the company’s payroll, and their taxation is done independently or by a managed service provider (MSP) or employer of record.

Employee misclassification occurs when a business wrongly classifies an employee as a contingent worker. This is of major concern for federal and state governments since misclassification results in a significant loss of public revenue (e.g., contributions to worker’s compensation and unemployment insurance), deprivation of employee benefits, and violation of employee rights. In turn, businesses face a string of consequences, including –

  • Fines and criminal penalties 
  • Potential jail time for intentional misclassification
  • Paying back wages, taxes, benefits, and penalties for misclassified workers
  • Legal action from employees, clients, and insurers
  • Serious reputational damage

Misclassification cases are costly and increasingly common. And in most cases, the affected organizations resort to expensive settlements, which are an even greater financial burden. 

Here are a few companies that made recent news – 

Uber agrees to an $8.4M settlement against a class-action lawsuit with California drivers.

Rover Group to pay $18M to settle worker misclassification litigation. 

Instacart to spend $46.5M in a settlement over worker classification.

Universal Logistics agrees to a private settlement with Teamsters Union due to employee misclassification. 

Stay compliant with an all-in-one workforce solution

As labor boards, tax agencies, and regulators worldwide become more focused on identifying discrepancies with worker classifications, businesses can substantially mitigate, if not prevent, the associated risks of misclassification audits — along with the resulting costs. Organizations realize that understanding and classifying workers can get tricky, even with effective assessment processes. Often workers fall into a grey area, and it is difficult to categorize them correctly. 

Managing contingent workers is now a strategic priority for business executives, and the use of compliance services has increased by 20% since 2019. Many companies are no longer self-managing their contingent workers. Instead, they are engaging with workforce solutions partners that specialize in independent contractor compliance to provide them with the necessary research, due diligence, strategies, and centralized management to bring conformity and risk reduction to their enterprise.

With Prosperix, you can always be sure of 100% compliance. Our VMS network helps you consolidate all of your staffing relationships into a single system and tracks the entire candidate lifecycle from talent sourcing through onboarding, contract signing, assignment termination, and redeployment. Since our solution is highly data-driven, we capture and present you with all the information surrounding your contingent workers on a granular level, including details on the nature of their assignments. Working in parallel, our MSP services ensure that you manage your contingent workers in accordance with federal, state, and local laws. We keep your contingent workforce programs safe, secure, and risk-free.

Are you facing compliance issues? Let’s talk.

Share this article

Articles you will also like

quiet quitting

Want to Avoid the Effects of Quiet Quitting? Here’s How.

The Collins Dictionary word of the year for 2022 is “permacrisis,” which they define as “an extended period of instability and insecurity.” For most people, the word perfectly captures this
Read Article
contingent workforce management glossary

Contingent Workforce Management: A Simplified Wordbook

Every industry has its jargon, and the staffing world isn’t immune. For newcomers in this space, making sense of the various industry terms and acronyms can be confusing. Acronyms can
Read Article
contingent workforce trends 2022

How Technology is Transforming Contingent Workforce Management

For any business that believed it was resilient to change, the pandemic was a loud, unexpected wake up call. Whether or not it was a rude one, the jolt encouraged
Read Article