PayReel’s reliable workforce management solutions are now available in Canada!

Find out more

You Misclassified an Employee. Now What?

Poker - Payreel

You Misclassified an Employee. Now What?

You Misclassified an Employee. Now What? 4464 2966 Alicia East

In the aftermath of the landmark California Supreme Court ruling, there’s much more attention on the W2 employee v. independent contractor debate. That makes it all the more important that companies don’t misclassify a worker — and more costly when they do.

Here’s what you need to know about misclassifying employees:


The gig economy, start-up culture and the rapid growth of the independent workforce combined have caused a dramatic increase in scrutiny by government agencies to ensure workers are appropriately classified. 

Updates to the ABC test for worker classification have resulted in the narrowest definition of an independent contractor to date. It’s now even more crucial for companies to evaluate or reevaluate the way they classify employees and get on the right side of the law before the ruling’s ripple effect reaches their headquarters.


You can’t ignore worker classification rules. And for the companies that do, there’s a potential multimillion-dollar price tag.

Unfortunately, “We didn’t mean to” doesn’t hold up in court. Whether you knowingly or accidentally misclassify employees as independent contractors (ICs), it’s considered wage theft.

Committing wage theft has some serious consequences. According to the ruling, businesses that misclassify workers as independent contractors deprive federal and state governments of billions of dollars in tax revenue. Big Brother is watching and Big Brother wants its money.

Misclassifying an employee puts your business at risks of an IRS audit. In addition to monetary fines like back pay, back taxes, severance and healthcare coverage for misclassified workers, you could also be looking at legal fees, reputation damage and even criminal and civil penalties.

For example, if you’re found guilty of fraud or intentional misclassification in Colorado, you “may be fined up to $5,000 per misclassified employee for the first misclassification and up to $25,000 per misclassified employee for a second or subsequent misclassification.” 

Oops, I misclassified an employee. Now what?


Conduct an internal audit on your company’s policies and documentation process. Run each worker through the ABC test to determine if they really are an IC or not. Look for areas that need improvement. If you’re missing any documentation (like signed contracts), take any steps to get what you need. If you think you’ve misclassified a worker, make sure you carefully document any changes you make. 

Sometimes, you can run your internal audits and still not feel confident you have the right status. If that happens, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. To be safe, you should treat the worker in question as an employee.

Not sure if you’re classifying your employees the right way? Take our five-minute worker classification self-audit and review our worker classification compliance best practices to determine just how independent your ICs are.


Worker roles can evolve over time, as do the rules around worker classifications, so it’s a good idea to review each worker’s classification annually and make adjustments as needed.

That’s a lot of work, which is why many organizations that contract ICs partner with an Employer of Record—a firm specializing in independent contractor compliance and engagement. An Employer of Record helps your company meet compliance standards, reduce misclassification risk and successfully manage independent workers. That’s exactly what we do at PayReel.


PayReel will help you manage your workers so your business can focus on doing what it does best. As your Employer of Record, PayReel will help ensure that all your freelance ICs are properly classified and your business stays ahead of the compliance curve. There’s no need to gamble with something so important. Contact us today! You can call us or email.