Employee Misclassification – a Real and Costly Risk for Connecticut Employers
February 7th, 2012Employers throughout Connecticut continually look for ways to save money.
And as one of the biggest line items on a typical balance sheet, labor expenses are a prime target for their cost-cutting strategies. In recent years, many businesses have tried to reduce expenses by changing the way they classify employees. By hiring independent contractors as opposed to traditional employees, these companies have:
- eliminated Social Security, Medicare and unemployment taxes;
- worked around overtime and anti-discrimination regulations, as well as minimum wage levels;
- avoided costly fringe benefits, such as health insurance, vacation pay and sick pay.
But in an effort to slash expenses, these employers may have also put themselves at risk.
More and more, federal government agencies are cracking down on companies that violate worker classification guidelines. The Internal Revenue Service (IRS) has strict regulations about employment classification – specifically, how much control the employer has over the way work is performed. To ensure compliance, the IRS is increasing on-site audits.
At the state level, lawmakers are also drawing a line in the sand. Pennsylvania, Wisconsin and California are among those that have enacted worker misclassification laws, imposing severe penalties on violating employers.
So while it may be tempting to save money this way, it’s also dangerous. If a business owner is found to have misclassified employees, the IRS will collect delinquent employment taxes and may also impose severe financial penalties. Misclassification can also lead to a host of other unpleasant consequences, including problems with benefits eligibility, work authorization and ultimately the company’s reputation.
The rules governing worker classification are notoriously complex. Still, as a responsible employer, it’s important to follow a proper vetting process to ensure you are properly classifying independent contractors. If one or more of these criteria applies to your contractors, they may actually be improperly classified (according to IRS guidelines):
- the employer has control over the means and/or methods of accomplishing work;
- the employer furnishes tools, equipment and/or materials for the worker;
- the worker is not allowed to work for other employers;
- the worker has agreed to work for the employer for an indefinite length of time.
These general criteria are no substitute for professional legal advice. If you suspect you may be misclassifying employees, be safe and consult your attorney.
Temporary and Contract Staffing Services – A Smart Way to Prevent Worker Misclassification
If you have work to be performed which is temporary, project-based or otherwise outside of your core business, consider using temporary or contract staff – as opposed to independent contractors. A.R. Mazzotta’s temporary and contract employees can help you complete critical projects, access specialized expertise and avoid the pitfalls of worker misclassification.
A.R. Mazzotta’s payroll transfer services are another safe and legal alternative to hiring freelance employees. With this option, you can mitigate your employment risk and reduce administrative burden by placing your temporary employees on our payroll. As their Employer of Record, we handle everything from paycheck processing and distribution through assumption of all mandatory tax and legal liabilities.
Contact us today to learn more.