Penalties Increase for Employers Who Misclassify Employees

May 14, 2012

Unscrupulous employers have been taking advantage of their employees for years, misclassifying them as independent contractors (sometimes called 1099 contractors) rather than employees of the company.  By doing so, the employer can avoid paying taxes, social security, health insurance, overtime pay and other benefits that employees may be entitled to.  Unfortunately, the global economic crisis has only made the financial motivations for misclassifying employees greater.  Many employers are examining—some for the first time—how much their employees actually “cost” them and are looking for ways to decrease that financial burden.  As a result, misclassifying employees has become a very tempting solution to help boost the bottom line.

The misclassification of employees is not only unethical, it’s illegal.  Misclassification cheats employees out of benefits that they may be entitled to.  Workers’ rights legislation is designed to prevent employers from taking advantage of those who work for them and penalize those that do. And recent changes to legislation have increased those penalties.

For example, Maryland recently revised their misclassification statute so employers in that state now can be fined up to $1,000 per instance if they fail to properly identify employees.  However, when compared with recently enacted California labor laws that $1,000 fine seems small indeed.

Californian businesses that are found to be deliberately misclassifying their employees can face financial penalties ranging between $5,000 and $15,000 for each violation.  In addition, if investigators find that the act of misclassification is a part of a pattern—that the employer has regularly engaged in similar fraudulent schemes in the past—they can be subject to additional fines ranging from $10,000 to $20,000.

In spite of the potential penalties, many companies are still violating workers’ rights and misclassifying them as independent contractors.  Why?  Because it is so easy to do.  Many employees may not know that they are improperly classified as an independent contractor.  The difference between an employee and an independent contractor can be hard to see—even for employees themselves.

Have You Been Misclassified?

So how can you tell if you’re an independent contractor or an employee?

The main difference between the two is the amount of control your employer has over the work you do.  Generally, employers can only direct independent contractors to deliver a result (finish installation of the electrical wiring by June 10th, for example).  However, employers can tell employees exactly how they want the work to be done and apply corrective action if the employee does not follow certain policies.  For instance, if your employer has you read training or policy manuals and dictates how you do things during the work day, it is possible that you should be classified as an employee.

Other relevant factors may include:

  • The permanence of your working relationship with the employer
  • Whether you own your own business and are hired by the employer
  • If you own the tools and equipment which you are using to do the job or if he employer provides them
  • Whether you get paid by the hour or by the job
  • How long you’ve worked for an individual or business
  • The degree of specialized skills required to do the work

If you’ve been misclassified as an independent contractor, you may have been denied overtime pay, benefits that were owed to you, or paid extra money in taxes.  You may be entitled to reclaim some of that money or the lost benefits your employer has been keeping from you.

If you think you’ve been misclassified contact one of the employment lawyers at Gibbs Law Group LLP. We’ve been helping employers claim their rights under various employment laws for years. Free and confidential consultations are available by filling out the form to your right or calling toll-free: (866) 981-4800.