What are the penalties for misclassifying workers?
If misclassification is determined, the agencies are allowed to scrutinize every 1099 assignment you’ve had for the last three years. Penalties and fees can include corrections for:
- Employee wages and missed overtime pay
- Missed FICA contributions and W2’s issued
- Paid leave and time off, lunch/rest breaks
- Health benefits premiums
Can’t I just pay the fines and continue misclassifying my workers?
If you have a higher tolerance for risk, that certainly is an option.
Let’s take a look at the possible cost exposure. The following scenario shows one misclassified worker who works an average of 50 hours/week for one year.
If that misclassified employee has worked for you for several years, then those expenses may go back for the past three years. Now your cost for continued misclassification is $122,880.
The powers-that-be can audit your entire vendor list for the last three years to identify each misclassified worker. Assuming you use the same classification strategy for multiple workers, if you have just 10 misclassified workers, the same scenario above would mean costs in excess of $1,200,000.
Factor in the cost of an attorney or your time to address the complaints and audits. Also, it is unlikely your insurance carriers will cover employment liabilities related to misclassification fines and penalties.
States take an especially hard stance against employers who “willfully” misclassify employees. Some even encourage misclassified individuals to bring private civil action against an employer for damages if “the employer had knowledge” of the individual’s misclassification.
If you do decide to carry the risk, you will want to monitor the guidance and case law in the localities where you have misclassified workers. Case law can quickly change expert opinions on who can be an independent contractor. You’ll also want to keep tabs on the different regulatory agencies since they can have conflicting definitions of “employee” even within the same state.
What happens if we face misclassification scrutiny while in a partnership with PayReel? Where does the liability fall?
We are confident in our classification methodologies and indemnify our clients against risks associated with worker classification performed by our experts.
We won’t pay a worker as an independent contractor (IC) unless they have completed our classification steps and have been determined by PayReel to be an IC. These steps include manager and worker surveys scored by our diagnostic tool– IC Advisor–in conjunction with backup documentation to justify the IC determination and agreements that define the project and the nature of the relationships.
How can PayReel help us navigate California’s AB5?
We can help you navigate California’s AB5 as well as other high-risk states with similar heightened classification scrutiny. We do so by partnering with you in:
● Assessing your current level of risk in each state against each classification criteria by locality
● Helping you prioritize which areas or roles to address first
● Creating migration and communication plans
● Joint execution with a superior worker experience
Don’t you think that AB5 is doomed to fail with all the backlash and will soon be repealed?
There is certainly a lot of AB5 pushback from California businesses and freelancers in the press. Instead of a repeal, we are seeing the state grant exceptions by industry. Those industries granted exceptions are still subject to the original Borello test and should have a consistent and careful classification methodology in place.
It is important to note that most states were very aware of tax revenue losses due to misclassification before AB5 and are watching California carefully. A few already have started drafting their own state laws similar to AB5.
Congress provided aid to gig workers through the Cares Act, indicating that federal and state agencies are more likely, not less, to scrutinize who should be eligible for employee protections.
Why do I need to reclassify this worker? This is how we’ve always done it/they’re a temp worker.
You may not need to. Whether or not a worker needs to be reclassified should not be answered without completing the classification steps. Each engagement is unique, and classification risk can change over time.
A “temporary” status does not inherently mean the worker should be an IC. Even an engagement lasting less than one day would land on the W2 side if the client has too much control over the engagement.
Until the last few years, many clients operated under this myth and were not called out on it. With the emergence of the gig economy, workers are better versed in their rights, and politicians/regulatory agencies are pressured fiscally and politically to take action. Employers are facing more classification scrutiny today than yesterday.