What You Need To Know About Misclassification of Employees

July 8, 2020 | Blue Wave Communications

In 2016, a judge approved a $27 million employee misclassification lawsuit settlement brought against popular ridesharing company Lyft on behalf of California drivers who claimed they were misclassified as independent contractors rather than employees.

The wage theft case revolved around the benefits that employees receive which independent contractors do not. While drivers classified as employees were entitled to expense reimbursements such as gasoline and vehicle maintenance, for example, independent contractors would not be compensated.

Lyft is not alone; unfortunately, misclassification of employees by employers is a widespread, expensive problem that harms both the government and employees.

What is Employee Misclassification?

According to United States law, misclassification of employees is the practice of labeling employees as independent contractors to allow employers to avoid paying taxes and fees, such as unemployment insurance and workers compensation.

Misclassification of employees reduces labor costs for employers, creating unfair competition when other businesses are legally classifying their employees and paying taxes and fees. It also has severe complications for federal and state governments, who lose out in millions of dollars from lost tax revenue.

A 2006 report from the Government Accountability Office estimated that the federal government lost over $2.7 billion from lost Social Security, unemployment, and income taxes due to misclassification of employees. State governments suffer too; that same year, Rhode Island estimated that more than 6 percent of its workers were incorrectly classified as independent contractors rather than employees.

However, misclassification of employees laws protect employees from being barred from their legal rights and protections allowed to employees but are not given to independent contractors. Workers misclassified as independent contractors are not afforded wage and hour laws, workers compensation, and unemployment benefits.

Why Do Companies Misclassify Employees?

According to the IRS, a worker is an employee if the employer controls what is to be done and how it is done. On the other hand, a worker is classified as an independent contractor if they are on contract labor and control the means and method of the required results with the employer having only the right to define the desired result. An independent contractor is on contract labor with the employer, meaning they only work per contract and not full-time as compared with a full-time employee.

Businesses have a major incentive in misclassifying workers since it significantly reduces labor costs. It’s estimated that employers that use independent contractors save 30 percent of labor costs compared to employers correctly classifying workers as employees.

Independent contractors and employees have different benefits. While employers pay taxes on employees, they do not need to for independent contractors. Employees are entitled to certain privileges as well, including protection of wage and hour laws, discrimination, and retaliation by employers. Workers classified as employees also may be legally entitled to benefits such as family medical leave, medical insurance, pension plans, and worker’s compensation for injuries incurred on the job. Employers are also responsible for Social Security, Medicare, and unemployment insurance for their employees. As a result, misclassification of employees by employers can result in businesses being convicted of tax avoidance.

In contrast, an independent contractor has no benefits or employer tax payments. They must pay for their own benefits or unemployment taxes, including a contractor tax. If an employee is misclassified as an independent contractor, they will likely underpay the contractor tax and necessary taxes due from a legitimate independent contractor. 

Recent Tax Avoidance and Wage Theft Lawsuits

Unfortunately, the IRS has numerous examples of wage lawsuits from unlawful employee misclassification.

For example, a Missouri daycare owner was sentenced in 2016 to pay over $890,000 in independent contractor misclassification damages and serve two years in prison for misclassification of employees. Lynn Jordon pleaded guilty of withholding taxes from the IRS and withholding employment taxes from her employee’s paychecks totaling over $200,000. She also acquired over $100,000 for failing to pay the employer’s portion of Social Security and Medicare.

Additionally, 2016 also saw a Tennessee business owner punished for refusing to pay more than $8 million in employment taxes. Larry Thornton, CEO of a check processing company, was ordered to pay more than $10,000,000 for tax avoidance and serve 12 months in prison. He refused to hand over money collected from employment taxes of employee paychecks and and his tax avoidance strategies cost the IRS nearly $9 million.

Selecting a Reputable and Fair Structured Cabling Contractor

Cabling contractors have also been caught red-handed conducting misclassification of employees for tax evasion purposes. For example, the cable contractor Cascom’s workers were found to be misclassified as independent contractors, thereby subjecting Cascom to a wage lawsuit over unpaid overtime and benefits.

It’s all the more important to select a reputable business for your cabling contractor needs. Blue Wave Communications is a trusted provider of low-voltage technology solutions with years of experience helping offices throughout Southern Florida organize and install their cabling. Blue Wave places high emphasis on professionalism and integrity, which we work hard to validate everyday to earn our clients’ respect and trust

Blue Wave’s proven track record and professional conduct can be traced to our professional qualifications. Our team of BICSI Registered Communications Distribution Designers (RCDDs) are fully-insured and state-licensed, so you know that you’re working with trained professionals who will help you find a solution to your cabling problems.

If you’re looking for a fair and reputable company to solve your cabling solutions, rest assured that Blue Wave has the professional difference. Contact us with any questions about who we are, or what our services can do for you.

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