Implications of employee misclassification on the employer

Implications of employee misclassification on the employer

On Behalf of | Mar 14, 2023 | Employment Law - Employer

The Fair Labor Standards Act (FLSA) requires employers to correctly classify their workers according to the criteria set by the law. After the employer sorts out the classification, it will specify in the employment contract which type a worker falls under. However, there are cases wherein employers, intentionally or mistakenly, misclassify an employee.

How does it happen?

There are two scenarios of worker classification: Independent contractors and employees and exempt and non-exempt employees. If a company marks an individual as a contractor when they should have been an employee, there is employee misclassification.

What happens then? In this case, the employer pays lesser taxes and benefits. These benefits include overtime, health insurance, pension contributions and other employee benefits. Moreover, this incident also breaches a substantial part of the worker’s rights, especially when it comes to employee protection from the law.

Possible penalties

If a company is guilty of employee misclassification, it may face penalties such as:

  • Payment of the misclassified employee’s payroll and benefits
  • Tax compliance order from the government for the misclassification period
  • Fines for the act
  • Lawsuits brought by the misclassified employee

These are some of the negative impacts of employee misclassifications. Aside from the legal implications, it could also negatively affect the company’s reputation.

Not always intentional

While authorities may think that an employee’s misclassification is intentional, it is possible that a company mistakenly misclassified a worker. To avoid penalties and legal ramifications, it is essential for employers to carefully manage their worker’s classifications and ensure that employment contracts clearly and correctly indicate each worker’s classification.