In recent years, the issue of worker misclassification has become increasingly important, with more and more workers being classified as independent contractors rather than employees. While this may seem like a small issue, it has far-reaching consequences for both workers and employers.
Worker misclassification occurs when an employer classifies a worker as an independent contractor instead of an employee. This can happen for a variety of reasons, but the main motivation is usually to avoid paying benefits, taxes, and other costs associated with employing workers. This is often done without knowing the legal implications and opens a company up to risk. Misclassifying workers can have serious legal, financial, and reputational consequences for employers.
3 Major Risks of Misclassifying Employees
1) Legal Risks 🏛️
One of the main risks of worker misclassification is legal liability. Misclassified workers can sue their employers for a variety of reasons, including wage and hour violations, discrimination, and wrongful termination. In addition, the government can also bring legal action against employers who misclassify workers.
For example, in 2020, Uber settled a lawsuit brought by drivers in California and Massachusetts who alleged that they had been misclassified as independent contractors. Under the settlement, Uber agreed to pay $20 million to the drivers and make changes to its driver classification system to give drivers more control over their work.
2) Financial Risks 💲
Misclassifying workers can also have serious financial consequences for employers. Employers who misclassify workers as independent contractors may be required to pay back wages and benefits, as well as penalties and interest. In addition, misclassified workers may be entitled to other benefits, such as workers’ compensation and unemployment insurance, that they would not have been eligible for as independent contractors.
For example, in 2019, FedEx settled a lawsuit brought by drivers who alleged that they had been misclassified as independent contractors. Under the settlement, FedEx agreed to pay $227 million to the drivers to cover back wages, interest, and attorneys’ fees.
3) Reputational Risks 🛡️
Finally, misclassifying workers can also have reputational consequences for employers. Companies that are seen as treating their workers unfairly or engaging in unethical practices can suffer damage to their brand and reputation. This can lead to decreased customer loyalty, negative media coverage, and other consequences.
For example, in 2019, Instacart faced criticism from workers and the media over its treatment of workers. Instacart was accused of misclassifying workers as independent contractors and failing to provide them with basic protections such as sick leave and workers’ compensation.
Conclusion
In conclusion, the risks of worker misclassification are significant and can have serious consequences for employers. Legal liability, financial penalties, and reputational damage are just a few of the potential consequences of misclassifying workers. Employers should be aware of the risks and take steps to ensure that their workers are properly classified. This includes consulting with legal and HR professionals, providing workers with clear job descriptions and contracts, and ensuring that workers have the benefits and protections they are entitled to under the law.
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At Enterforce, we consult with our clients and potential clients to help them identify areas of risk, and how to fix them, including risks from misclassifying workers. With our workforce and MSP solutions, we are able to bring our clients into full compliance and help them increase visibility into their hiring practices. Contact us today to learn more about any of the strategies and solutions above.
