Employee Misclassification Penalties You Should Avoid

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Worker Misclassification

It is important that employers avoid running into worker misclassification. Misclassified employees can be deprived of their right to benefits. Both the Employment Development Department and the Labor Commission view it as serious offenses when employees are not classified accurately and are therefore deprived of their rights to unemployment benefits, disability benefits, as well as overtime and underpayment, or wage theft.

Independent Contractor Misclassification

California’s Governor signed Assembly Bill 5 into law on September 18th. The law expects that employers will use the “ABC test” to determine if workers are employees or independent contractors. 

  • (A) The worker is free from the company’s control
  • (B) The job falls outside the company’s “Usual Course of Business.”
  • (C) The worker typically operates a separate business from the company

When a worker is misclassified as an independent contractor, they are not subject to the minimum wage and overtime protection laws in California. These workers have no access to workers’ compensation coverage if injured on the job. Along with this, they have no right to family leave, unemployment insurance, no legal right to join a union, and no protection against employer retaliation. Misclassifying workers is not fair to honest employers who honor their obligations to their employees and an employers’ failure to comply with these laws can lead to strict punishment. 

Audit Triggers

Companies that utilize both W-2 employees and 1099 independent contractors need to classify them correctly for tax purposes.

Failure to properly classify your workers in the accurate groups can face penalties such as back wages, taxes, and interest due. You could be subject to the Employment Development Department audit, in which 10-30% of audited employers are found to have misclassified their employees.

The IRS will take notice if an employee has been classified as a 1099 independent contractor but the employee files a claim for unemployment, workers’ compensation, or disability. An audit will be triggered if someone receives both a W-2 and 1099 in the same year.

Reverent Employer Consultants will assist you in complying with the necessary requirements so that you minimize your business exposure to such risks, audits, and penalties. Call Reverent today to avoid these issues ahead of time.

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