Penalties in the Era of the Gig Economy

The contingent workforce is growing rapidly. With independent contractors growing 40% in just ten years and some organizations dedicating upwards of 30 percent of their workforce pool to be independent contractors, the government is paying far more attention to how employers comply with the Fair Labor and Standards Act. The truth is, worker misclassification can hurt both workers and employers, although the regulations are in place to protect the individual worker. These are some of the consequences that both workers and employers face with worker misclassification:

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‍Underpayment

Typically, employers pay a certain number of taxes as part of an employees payroll. These include social security, unemployment, and other taxes. In most cases, independent contractors take on these expenses in the form of self-employment tax which they pay directly to the government. It isn’t uncommon for a worker who is labeled as a contractor to be paid less than an employee and still be responsible for these additional costs.

Labor Rights Violations

The Fair Labor and Standards Act plus subsequent laws passed by Congress layout in fairly explicit detail precisely what worker protections must be followed. When it has been determined that those regulations haven’t been complied with, the government uses enforcement power, usually in the form of significant fines, to force compliance.

The government has the authority to levy stiff penalties against organizations found to be improperly classifying workers.

While each case can be different, fines can be assessed for a myriad of different violations. For example, for every worker found to be misclassified, there can be fines of $50 dollars for every W-2 form that wasn’t filed, 1.5% of wages plus interest, and 100 percent of the employers matching FICA contributions, plus others. If it was found that the misclassification was intentional, those fines can rise rapidly. Up to $1,000 dollars for every employee in criminal fines, 20% of wages and even jail time are a possibility for these more serious intentional infractions.

Other Legal Issues

Government regulators aren’t the only ones with the power to enforce these labor laws. Employees and independent contractors have the ability to bring their own legal complaints against employers and have sometimes seen staggering awards. In the well-known case of Uber drivers who were classified as independent contractors, a settlement was reached that awarded the drivers $100 million dollars. That settlement was later thrown out by a federal court who deemed the settlement figure too small.

How to Avoid Employee Misclassification

As shown above, there are penalties for employee misclassification regardless of whether or not it was intentional. That means that avoiding this mistake saves your organization time and money. That’s why it’s important to create an atmosphere of enhanced compliance and awareness from the top down, beginning during onboarding.

The Five Cs of Strategic Onboarding:

1. Commencement
2. Compliance
3. Clarification
4. Culture
5. Connection

What can SmartERP’s Smart Talent Procurement do to help organizations?

Organizations want and need to make sure that the independent contract work being requested is going to be compliantly and correctly performed per the government’s and the organization’s own rules. Organizations should also perform some curation of their contracted workers since suppliers do not often fully qualify their workers or project work.

It’s up to the organization to make sure that:

• The work their hiring managers are offering is truly classified as suitable for independent contractors – per national standards (IRS) and state/municipality standards.
• If the work requested doesn’t qualify then how can it be modified or offered to vendors under a different compliant classification under some managed system?
• The contingent worker being offered a position has all that’s needed to work at the organization, or business unit, or location, etc., that’s hiring them. For example, the worker needs to provide evidence that they have enough insurance or certifications to do the work.
• The workers being hired to do the work are efficiently and compliantly onboarded as to save time, expense and to provide all with a more streamlined, less risky and efficient operational environment.