Classifying workers as independent contractors instead of employees brings many benefits to employers, especially in terms of saving money. However, the misclassification might lead them to face serious consequences such as lawsuits, fines, penalties, and even jail time. It depends on each country’s rules.
So, how to correct employee misclassification? When you find out that you have misclassified workers, you should be responsibly compensating the workers as well as the government for benefits, back taxes, and other fines.
What Is Employee and Independent Contractor Classification?
What are the differences between an employee and a contractor? Let’s find out.
What Is an Employee?
An employee is an individual who performs a service that is being hired by another person or a company in exchange for a fixed compensation, known as salary.
Workers don’t need to work full-time to be considered employees. They can be part-time, full-time, or even temporarily hired. Besides, employees are permanent members of the company who are paid and taxed. Moreover, they are entitled to some benefits, including overtime pay, health insurance, paid vacation, sick leaves, social security, unemployment benefits, and other benefits.
See more: how to hire employees?
What Is an Independent Contractor?
An independent contractor is a self-employed or entity contracted who performs a service to a person or a company as a non-employee. They have a set of skills and a deep understanding of some fields that meet companies’ requirements. From then, companies can leverage the ability of independent contractors, usually outside the company’s area of expertise, to achieve objectives.
Contractors have more control over their work than employees. Contractors will determine the job they’ll do (usually, it is what they love), where and when they work, and the rate they’ll be paid. As they are not employees, they’ll not receive the benefits employees can get.
5 Indicators of Employee vs. Contractor Misclassification
To see whether a worker should be classified as an employee or a contractor, you might want to take a glance at the following questions:
Who decides when the work is performed?
Typically, employees will work according to the schedule designed by the company. From 9 am to 5 pm and Monday to Friday, employees will devote all their time and effort to the business. Meanwhile, contractors can choose what they want to do and take many breaks as they want as long as they deliver the product or service on time.
Where is the work done?
While contractors can work anywhere, they feel energetic and comfortable, employees usually work in the office’s space with fixed chairs and tables. However, remote work is on the rise now, especially after Covid-19; people tend to work from home or other locations where they feel pleased.
That’s why you should compare the ability to work outside the office when defining the difference between employees and contractors. The more they need to work in the company’s space, the more they are an employee. However, it doesn’t mean that the more they work outside, the more they are likely to be contractors.
Who provides the equipment?
Employees are provided with the necessary equipment to perform their jobs, such as computers, laptops, phones, headphones, and other tools. On the other hand, contractors need to equip devices independently, and these tools are often purchased with their money.
However, some companies will provide equipment to contractors if they miss something or ask for devices to perform and complete some specific tasks.
How is the worker paid?
Most employees are paid monthly through the payroll system. In contrast, contractors often withdraw income from each project. Businesses are responsible for deducting necessary taxes and other social contributions on behalf of employees. On the other hand, contractors are usually paid without holding tax, but they must pay taxes independently.
Who is responsible for the additional costs?
In the process of completing the project implemented by employees, if any additional costs are incurred, employers will be in charge of the costs. However, unlike employees, contractors are responsible for the expenses incurred during the project.
Nowadays, misclassification deprives workers of rights and protections and removes the amount of money that governments should contribute. That’s a reason why governments from many countries all over the world are tightening legislation and increasing penalties for those who are misclassified workers.
Despite the severe consequences they might get, many employers still deliberately misclassify workers as contractors to get the best benefits for their business. Below are some of the results they might get:
- Penalties and fines
- Back wages and benefits
- Legal issues
So, if you want to avoid penalties, let’s move on to the next part to find out how to correct employee misclassification.
How to Correct Employee Misclassification
When you misclassify your workers, don’t just think that it will go away quickly. You can correct employee misclassification by being responsible for both employee and government. You need to pay back the compensation such as benefits, taxes, penalties, and other fines associated with the problem to avoid legal issues such as lawsuits and jail time.
To prevent employee misclassification when hiring staff abroad, it is crucial to understand the local labor laws before partnering with any workers. However, doing that might cost a significant amount of time and resources. Hiring an EOR like ERA staffing agency is the best way to avoid employee misclassification.
So, what is EOR, and when do you need to hire EOR? If you want to employ workers in a country where you don’t own a legal entity like Vietnam, you must use EOR, which stands for Employer of Record. The EOR takes care of all complex employment duties such as payroll taxes, deposits of the workers, and other specific tasks related to employment.
5 Factors to Calculate Employee Misclassification
If you find out you misclassified an employee, you can estimate how much you need to pay back based on the following factors:
- How long has the worker’s classification been misclassified?
- How much did you pay the employee?
- What company benefits would you typically provide a worker with the same position performing similar duties?
- What amount of taxes would you have paid on behalf of the employee?
- What are the rules of the government for misclassification penalties?
Frequently Asked Questions
What are the penalties for misclassifying employees?
When an employer misclassifies an employee as an independent contractor, the labor authority may consider the misclassification as intentional circumvention by the employer.
As a result, employers may be fined and have to return unpaid wages, employment taxes, statutory benefits such as holiday pay, sick pay, and other benefits to employees during the entire time the employee is working. Employers will also be penalized for non-compliance activities in the country.
What are famous employee misclassification lawsuits?
Several lawsuits against employees’ misclassification are well known worldwide as ride-hailing giants Uber and Lyft for allegedly misclassifying drivers as independent contractors instead of employees.
In short, if you are worried about the employee misclassification and want to avoid severe penalties and fines, consider ERA staffing agency as your partner and let us take care of these problems. With many years in charge, we know how to deal with it. Feel free to contact us if you have any questions.
Ms. Tracy has worked in human resource consulting for over 15 years. A driven entrepreneur focused on business expansion and people development. She previously worked as Country Manager for an international Australia firm that specializes in global workforce management, as well as several key roles as Business Growth Director and Executive Search Director for both large local firms to effectively drive their business growth. A strong emphasis is placed on aligning organizational priorities/objectives with business needs. She has a large network of local business leaders and a thorough understanding of the local market.