How to Avoid Misclassifying Your 1099 Contractor

The ADP Research Institute states that more than one-third of midsized businesses have been fined due to misclassification of their workers.  With the hire of independent contractors on the rise, it is increasingly important that employers understand the risks of misclassification.  Fines for non-compliance from the US Department of Labor to the IRS and state agencies can cost employers millions of dollars.

The Risks Involved With Misclassifying 1099 Contractors

Wage law violations are put in place when an employer fails to pay overtime or minimum wage.  Violations can be deemed either willful—meaning an employer knowingly violated the law or was lax in understanding and complying with their legal obligations as defined by the law—or non-willful, according to the Fair Labor Standards Act.

The Department of Labor continues to ramp up their efforts to identify violations for misclassifying independent contractors, which can result in both criminal penalties and liability for back wages. Employers found in violation may incur steep penalties, including unpaid overtime costs and minimum wage deficits—costs that may be equaled by liquidated damages and lawyer fees.

We’ve summarized the following 10 most common misclassification violations to watch out for, as follows:

1. Age Discrimination Violations - Employees over 40 are protected through the Older Worker’s Benefit Protection Act. Employers who do not properly complete the required releases and waivers are at risk.
2. Anti-Discrimination Violations - Employers are required to offer coverage for state and federal anti-discrimination laws for those improperly classified as independent contractors.
3. FMLA Violations - The Family and Medical Leave Act offers leave and reinstatement to the appropriate employees.
4. WARN Act Violations - The Worker Adjustment and Retraining Notification Act has been put in place to keep compliance in case of mass layoffs and plant closings.
5. Workers Comp Violations - Workers compensations offers compensation and medical relief to those injured while on the job.
6. USERRA Violations - The Uniformed Services Employment and Reemployment Rights Act protects military personnel’s reinstatement and leave rights.
7. Tax Violations - Withholding state and federal payroll taxes, social security, and Medicare payments can put an employer at risk.
8. I-9 Violations - An employer is required to keep accurate I-9 reports for all employees.
9. Unemployment Insurance Violations - An employer’s contribution rate to unemployment insurance is determined based on the number of employees within that business.
10. Improper Exclusion from Benefit Plans - Misclassifying an employee can cheat him/her of their right to employee benefits. Some benefits that an independent contractor is entitled to when classified properly include pension and other retirement, health insurance, paid leave, and severance pay.

Ensuring your employees are properly classified can help reduce your risk of costly penalties and fines. Implementing a time and attendance system can keep you in compliance.  A time and attendance system allows you to keep your records backed up to an online system, guaranteeing that you do not misplace any important information.  You can also feel confident that employee time and attendance is accurate and up to date, and you are not missing any overtime.  Learn how EPAY’s time and attendance system can help keep you in compliance. Schedule a demonstration today.

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