Employee Misclassification Guide: The Key to Avoiding Penalties

Is your company strictly following the laws pertaining to employee misclassification? If you are not doing it right, chances are that your company would have to pay hefty fines. In 2019, Infosys, one of India’s IT giants, had to pay $800,000 to California for misclassifying its foreign workers and avoiding California payroll taxes. Further, a July 2022 review report of Nike’s contractors in US and some European countries made a shocking revelation. It stated that Nike is subjected to a risk of employee misclassification that may cost it more than $530 million.

From fines and penalties to lawsuits and reputational damage, the consequences of employee misclassification can be severe. In this article, we will delve deep into the various legal complications that can arise from misclassification and discuss strategies to protect your business. So, let’s get straight into the topic!

Table of Contents

What is Employee Misclassification?

When a company unlawfully classifies a worker as an independent contractor despite the person being an employee, such a situation gets the definition of “employee misclassification.” Misclassifying workers often turns out to be an unconscious mistake on the part of the companies. However, some firms deliberately don’t give the workers their deserved employee status to save expenses and evade employment taxes.

Governmental authorities and their subsidiary tax regulators carry out the duty of scrutinizing if an individual’s working status has been lawfully categorized. Research reports show that, about 10% to 30% of US recruiters, who underwent IRS Misclassification Audit, have categorized workers wrongly.

To gain clarity as to whether your company too is not making the same mistake, we need to understand the misclassification of employee as independent contractor in the light of certain factors. Basically, these factors include the extent of work flexibility, financial arrangement, provision of benefits and relevant equipment, etc. However, these are not the absolute criteria because of varying laws prevailing in various states.

Employee misclassification also goes by several names, such as:

  • Disguised employment;
  • Worker misclassification;
  • Sham contracting;
  • Independent contractor or 1099 employee misclassification

Why do Authorities Consider Employee Misclassification to be Unlawful?

Misclassification of employees is a severe act of worker exploitation. This is because, employees don’t receive insurance benefits and other perks. Further, companies commit the illegal act of evading taxes, which is akin to an offense. Let’s have a closer look at the various reasons that trigger the authorities to take action against the perpetrators of misclassifying employees.

Severe Loss of Taxes

In a conventional employer-employee relationship, it is the former who needs to take care of paying payroll taxes for each employee working under them. When companies misclassify their workers, they are simply doing away with paying taxes to the designated authorities. Since no tax withholding takes place, the government faces intense loss of public tax revenue. Usually, under the US federal government’s Fair Labor Standards Act, payroll taxes include the following:

  • Social Security Taxes;
  • Medicare Taxes;
  • Federal Income Taxes

Worker misclassification is one of the crucial factors that have intensified financial crisis in the USA by significantly reducing the revenue collected from public. Owing to 1099 employee misclassification, the company doesn’t deduct these taxes from the employee’s salaries. As a result, when the worker moves ahead to file their respective income taxes, the government faces substantial loss of tax revenues. After all, it is a bit more troublesome to track tax compliance with self-employed professionals than with employers of a company.

Exploitation of Workers

Misclassifying employee results in gross exploitation of workers. This is because, when a company gives an employee the identity of an independent contractor, the latter doesn’t get to enjoy any of the benefits and other protections, to which they have legal access. The various provisions that an employee usually enjoys include:

  • Overtime pay;
  • Minimum wage;
  • Sick leave;
  • Unemployment provisions;
  • Rest periods

Contrarily, an independent contractor doesn’t enjoy any of these rights or provisions. So, they will have access to only those perks that the independent contractor agreement makes a mention of.

It is the duty of the government to ensure that all the employees get legal backing and enjoy their deserved rights, thereby accounting for the government’s responsibility to look into the issues of employee misclassification.

Acquisition of an Unjust Compensatory Advantage by the Employers

It is an established fact that the cost of recruiting an employee is quite high as compared to that of an independent contractor. As a result, by misclassifying employees as contractors, companies are gaining an undue economical advantage. This is because they are not having to offer them social security provisions and other benefits. Further, they are not even withholding their taxes by treating them as contractors. Government authorities stay wary of the fact that, by doing so, employers are not only saving company costs illegally but also depriving employees of their due rights and incentives. To restrict the employers from enjoying this unfair monetary benefit, employee misclassification has been established as a costly offense.

Exclusion of Social Benefits in case of Employee Misclassification

All employers ought to offer social benefits such as health care provisions to employees by law. Companies also need to earmark a certain percentage of the total income of the employee to go into the retirement funds. Misclassification of employee as independent contractor results in the worker not being able to enjoy any of these benefits. This results in the worker performing their duties as an employee is expected to, but with provision of compensation and benefits at subpar level. Therefore, to give justice to the misclassified employees and bring about the proper execution of public policy, governments stay concerned of companies committing mistakes in affirming the workers with the right identity.

What Factors Determine the Classification of a Worker?

The form of business relationship between the worker and the hiring entity, provision of equipment, financial arrangement, level of work flexibility, etc., are the various factors that help ascertain the identity of a worker as either an employee or an independent contractor.

Lyft, an American Transport-as-a-Service (TaaS) company, had to agree to pay $27 million to get out of a lawsuit, as a part of employee misclassification settlements, in 2013. If you wish to safeguard your company from undergoing such heavy loss of money in the form of penalties, understanding what differentiates an employee from a contractor is essential.

Points of Difference Between an Employee and an Independent Contractor

Factors Employee Independent Contractor
Working Relationship Employees work only for a single employer, as is the norm. Independent contractors are self-employed professionals. They are free to work on multiple projects, with several clients simultaneously.
Work Schedule Employees ought to perform their services as per the company-set schedule. Contract workers have flexible schedules; they are free to work as per their set hours.
Equipment  Employees receive relevant equipment or tools that are needed to carry out a particular task successfully, from the company itself. Contractors need to procure the required tools and equipment by expending bucks from their own pockets.
Training  Employees receive work-related training sessions periodically. Contractors don’t receive any such training from the hiring entity. This is because they need to take care of upskilling by themselves.
Benefits and Incentives  Employees receive various benefits such as health insurance, overtime pay, contributions to the retirement fund, etc. Independent contractors are not entitled to receive any such benefits.
Financial Arrangement  Employees’ salaries get credited via the company’s payroll. Contractors’ salaries get credited via generation of invoices.
Taxes Employees’ taxes are withheld from their gross salary. No tax deductions from the contractors’ earnings take place. So, they need to file their own self-employed income taxes.
Work Supervision  Employees are constantly supervised by their immediate managers in a company. Contractors’ works don’t receive much supervision or monitoring from the hiring entity. Only their final deliverable goes through a process of reviewing.


To learn more about Foreign Independent Contractors, click here.

What is a Third Worker Classification?

Here comes a unique category of worker!

Apart from employee and independent contractor being the two categories of workers, there exists a third worker classification. Interestingly, these workers carry out their duties akin to that of an independent contractor. However, by law, they ought to receive all the benefits that an employee receives.

Such employees are broadly known as “Statutory Employees” in the US. To state in simple terms, they are simply contract workers entering into a working relationship with another contracting entity. As a result, there is no function of any hiring entity, company, employer or client. Usually, these workers receive almost all the employee benefits such as overtime pay, retirement funds, minimum wage, etc.

Unlike employees and independent contractors, the number of statutory employees in the USA is scarce. The IRS incorporates only the four categories of workers into the domain of statutory employees.

  • Drivers responsible for delivering raw food materials and laundry items;
  • Insurance sales agents;
  • Sales professionals selling articles to retailers or hotels;
  • Piece workers working on delivering goods to the contracting party

In the UK, this category of workers is given the simple name of “workers.” Therefore, to gain a detailed understanding of tax payments, check out the UK Govt.’s CEST tool. In that way, you will understand if you have to pay taxes for the category of workers that you are hiring.

If you are hiring independent contractors in the UK, you may want to check out: Hire Independent Contractor in UK- A Comprehensive Guide

Not sure how to pay contractors in UK? Click here to get your answer!

What are the Various Employee Misclassification Penalties?

Worker misclassification, if caught at the time of IRS misclassification audit, may result in severe penalties. These usually vary from imposition of monetary fines to imprisonment. However, the severity of the misclassification consequences vary, depending upon certain factors. These include:

  • Local labor laws;
  • Size of your business;
  • Time period for which the provision of employment incentives and government taxes have been evaded;
  • Intent of the company behind wrong classification of employees

Fines for Violating Tax-paying Norms

At the time of hiring an individual as an employee, you need to withhold US federal payroll tax from their income. In case of misclassification of employee as independent contractor, IRS misclassification complaint will be launched against your company. As a consequence, you may have to face the following penalties for breaking the law and making your employee work on inferior terms:

  • Fine of $50 for each wrongly classified employee’s W-2 tax form that you escaped filing;
  • 100% of the FICA or US federal payroll taxes that you didn’t pay for the misclassified employees;
  • Up to 3% of the salary of every wrongly categorized employee;
  • A maximal limit of 40% of the FICA taxes that the company didn’t deduct from the salaries of the misclassified employees

Fines for Non-adherence to Federal Laws

Federal law violation involves flouting the federal safeguarding that is bestowed upon every employee working in a company. By misclassifying employees, you deprive them of mandatory employment benefits such as minimum wage, pension, overtime pay, etc. These benefits come under the purview of FLSA rules in the US.

The US Department of Labor may crack down on your company any day by deploying its auditors to conduct IRS misclassification audit. If found that it was an honest mistake, you may just have to pay back the amount that you didn’t pay. However, if it was done deliberately to save costs, the array of impacts can be severe:

  • Imprisonment up to 1 year;
  • Fines up to $1000 for every employee who has been misclassified;
  • Class-action lawsuits demanding retributive charges with employee misclassification attorney charges;
  • Repayment of employee benefits that include paid leaves, retirement funds, health insurance, etc.;
  • Separate worker misclassification claims demanding the disbursal of employee benefits, insurance, and penal damages;
  • Further employee salary claim inspections looking into additional violations in the last 3 years

 Reputational Damage Owing to Employee Misclassification

In 2021, Servant’s Quest, a home-healthcare service providing company in the US, had to pay $358, 675 in back wages. It had to pay the penalty for misclassifying 50 employees as independent contractors.

It goes without saying that, falling in the bad books of the authorities and getting tangled in a lawsuit, casts adverse effects on the company’s reputation. Employees may start leaving your company, resulting in employee attrition on a large scale. Other employees, who have been properly classified, may start raising their voices in favor of their colleagues who have been misclassified. Further, if your company’s name gets associated with a high-profile lawsuit, employees may want to get rid of their sense of belonging to your firm. So, the cumulative impact would be really miserable for your business.

If you want to avert the risk of misclassification at the earliest, Asanify is here to help. Asanify’s end-to-end HRMS and Contractor Management Software would aid you in staying compliant with the labor laws. No matter if you are hiring an employee or a contractor, Asanify will aid you in classifying your workers aptly.

How to Avoid Risks of Employee Misclassification as an Employer?

Are you wondering as to how you can be sure that you are not misclassifying workers, even by mistake? Well, we are here to help! Often, misclassifying employees turns out to be an inadvertent mistake. To make you aware of the right worker identity and maintain the boundary line of difference between employee and contractor, let’s have a look at the steps that you can adopt to stay compliant.

Draft an Independent Contractor Agreement

Drawing up an independent contractor agreement is essential to establish the identity of the worker as a contractor. By using this legally binding document, you can set out clear work expectations, and define the way remuneration disbursal will take place.

In case of any allegations of worker misclassification, you can simply showcase this independent contractor agreement to defend yourself. Therefore, make sure that the document protects the interests of both the parties- client/company and the contractor.

Do note that, just having this agreement in place won’t save you from penalties and lawsuits during IRS misclassification audits. You need to treat the contractor as per their work identity, and not as an employee. This means that you ought to allow the contractor to work as per their own schedules with little or no supervision.

Also read: Independent Contractor Agreement for USA (Download Template)

Planning to hire independent contractors in other countries? Just click on the country from where you are going to hire contractors, simplify contractor management, and avoid misclassification.

Take Help of EOR Service to Prevent Employee Misclassification

Outsourcing the complex task of hiring your company’s employees to a third-party service provider is known as Employer of Record or EOR. And, by suggesting you to resort to an employment service, we mean just that. By using EOR, you can put a stop to all your worries about employee misclassification lurking in your head. This is because, compliance experts will undertake the task of classifying workers in accordance with the laws of the country where the hiring is taking place.

Click here to use Asanify’s Employer of Record that will take care of the payroll, statutory compliances, and much more- while you stay worry-free without having to stress over penalties or lawsuits.

Want to know more about EOR? Well, all that you need to know is just a click away!

Conduct Employee Misclassification Audits Periodically

Does your company work with multiple independent contractors? If yes, it is prudent enough to conduct employee misclassification audits at regular intervals, say once every year. All you have to do is just check your contractors’ working process and ensure that this upholds the difference between a contractor and an employee.

Let’s now understand how you can undertake misclassification audits at your firm.

Firstly. create a list of all the non-payroll workers associated with your company. This will include all the self-employed professionals, freelancers, contractors, gig workers, etc. The method of test to be used in the audit will vary, depending upon the law-backed test prevailing in the country from where your contractors hail. Secondly, you need to check that, for every contract worker, there is a separate independent contractor agreement in place. This document is important for it defines the working relationship between the company and the contractor while laying out work scope, payment terms, working hours, etc. Thirdly, contact your local law experts who will interview both the hiring manager and the contract worker of your company to ensure if the responses perfectly align and then announce the level of misclassification risk.

Important Independent Contractor Tax Forms

To avoid worker misclassification, it is crucial to stay aware of the various tax forms that are needed when you move ahead to hire independent contractors. If you miss out on asking your contractors to fill these tax forms, the doom of misclassification will loom large.

Let’s see what these tax forms are!

Form W-9

This important tax form in the US is necessary to record the independent contractor’s name and Tax Identification Number or TIN.

Form W8-BEN

This IRS form aids in establishing the foreign status of an individual or a business. It is used to procure credible information about a taxpayer who is a Non-resident Alien. By establishing their country of residence for purposes of taxation, they get the assurance of qualifying for a reduced rate of tax withholding.

To know more about Form W8-BEN and the procedure of filling it, click here.

Form 1096

To define in simple terms, Form 1096 acts as a page summarizing multiple forms, inclusive of Form 1099. You won’t have to file Form 1096 separately, if you are doing so digitally.

Form 1099

If you are paying $600 or more as remuneration to independent contractors or non-employees associated with your company, filing Form 1099 is essential. It is used to report a diverse array of income being paid to the non-employees. In that way, the IRS gets to have a record of the income credited to the contractors of your firm.

Since the reported income of the non-employees is not subjected to traditional payroll tax deduction, they need to file and pay taxes on their income by themselves. Make sure that your contractors are doing the needful and filling Form 1099 to report their drawn income to the IRS.

Also read- Everything You Need to Know About Filing Form 1099: A Comprehensive Guide

Top 5 Ways to Identify the Status of a Worker and Avoid Employee Misclassification

Studies reveal that misclassification adversely affects almost 10% to 30% of the US firms. To safeguard your company from the consequences that employee misclassification brings with it, acquainting yourself with the tests used to affirm the status of a worker is essential.

The tests used to determine the status of a worker varies, depending upon the country and the jurisdiction where a particular set of laws made by the government reigns supreme.

Let’s have a look at the 5 most common types of tests that help confirm the status of a worker in the US.

Test Based on Rationality

As per the test based on rationality, you may choose to classify your workers as contractors if there is a rational cause behind doing so. Logical factors justifying the independent contractor identity of a worker are as follows:

  • Completion of IRS misclassification audits in the past that didn’t result in the discovery of any anomalies in worker classification;
  • Prior consultation with an employee misclassification attorney or a Certified Public Accountant;
  • Workers rendering services to your firm under similar conditions are categorized as contractors across all the companies falling in that very industry as yours

US Department of Labor’s Economic Reality Test

Keeping a worker’s financial arrangement with their employer as the focal point, the US Department of Labor uses a test for classifying their working status. Usually, an employee depends on a single employer for their sustenance and livelihood. However, self-employed professionals are free to take up multiple projects and work with more than one clients. In such a case, contractors would not depend solely on a single employer.

The answers to some of the basic questions that the DoL seeks to determine the nature of the working relationship between the worker and the client, include:

  • Whether the services rendered by the worker make up the central business task for the company or the client;
  • Whether the professional relationship between the worker and the hiring entity is for a permanent or temporary period;
  • Whether the worker procures the required tools and equipment by themselves;
  • Whether the worker has a scope of gaining profit or suffering loss from the service rendered

The “Right to Control” 20-Factor Test by the IRS

To examine if an employer-employee relationship exists between a worker and a hiring entity, the IRS uses the “Right to Control” 20-factor test.  The idea is to check the extent of control the employer has on the worker. As is obvious, if greater control is exercised over the worker, it is an employer-employee relationship. If the worker enjoys autonomy while working and setting up work schedules, they are likely to be contractors.  This test takes into account 20 factors grouped under 3 broad categories. These include:

  • Behavioral: Factors under this category reveal the extent of control the employer has over “where, when, and how” the worker completes a particular task. Basically, these factors seek answers in matters related to how the worker performs their job, setting their work schedules, getting work-related instructions, procuring the required tools, etc.
  • Financial: Under this category, the factors used to determine the worker status are concerned with the way payments are made. It determines whether the worker receives remuneration monthly when the company runs the payroll or via the process of invoicing. Further, factors such as whether the worker spends on the required tools and equipment themselves or receives these from the company are used to ascertain the worker identity.
  • Nature of Relationship: Analysis of the nature of relationship is carried out by understanding if the employer offers any kind of employee benefits to the worker or the decided terms as per which, either party may decide to terminate the working relationship.

Click here to learn more about Independent Contractor Agreement for USA and the various Do’s and Don’ts for the same!

The ABC Test

The ABC Test, as mandated by the California Supreme Court, is one of the most usual ways to establish the identity of a worker in the US. As its name goes, this test uses three core factors to bring to light the real status of a worker. These include:

  • A: The worker has great degree of work flexibility and can set their own work schedules. Further, they can work with minimal or no instructions from the employer.
  • B: The service that the worker renders doesn’t form the core aspect of the client’s business.
  • C: The worker runs an independent business or trade and performs the same kind of work to complete projects for other clients too.

Form SS-8

Using Form SS-8 is another way to establish the identity of a worker. Workers and companies may file Form SS-8 and request the IRS to conduct an audit and affirm if the services provided by a worker match the role of an employee or an independent contractor.

Unsure if you are classifying your workers in the right manner? Just file Form SS-8 and you can get a confirmation regarding worker identity.

You can use any of these methods to test the status of your workers in the US. However, if you are looking to hire contractors from the UK, you can use the Check Employment Status for Tax or CEST tool to understand if a worker is an employee or an independent contractor.

Legal Protections for Contractors to Fight Worker Misclassification

The law-making body of several countries all over the world are coming up with their own set of legal regulations concerning the protection of rights of independent contractors. Having these laws in place is essential to prevent the exploitation of contractors. In that way, they won’t have to function like employees usually do, yet staying aloof from any kind of benefits by working in subpar conditions.

Interestingly, Australia offers equal legal safeguarding to both contractors and employees. So, the hiring entity here may need to deduct taxes from the income of contractors as well.

In the USA, contractors enjoy legal safeguarding owing to the existence of national laws governing the misclassification of employee as independent contractor. Despite the prevalence of the laws set up by the IRS, some states in the US have come up with their own legislation to protect the rights of the contractors. Let’s see what those are!

California-drafted Laws

In 2018, the legislative body of California restated the classification of worker test, as mandated by the California Supreme Court. In this state, all workers are assumed to be employees by default, unless it is proven otherwise by the ABC Test. Only if a worker performs operations that don’t fall under the core part of the company’s business can they get the identification of being an independent contractor.

Assembly Bill 5 (AB 5) of California further stretched out the status of an employee to all those companies such as Uber and Lyft, hiring gig or platform workers in bulk. Later, in November 2020, after the Californians voted for the approval of Prop 22, a change came in. Prop 22 permitted the employers to exclude the platform workers from this mandate and give them the identity of being a contractor. However, Prop 22 came to be declared as going against the provisions of the constitution, thereby re-establishing the dictum that companies ought to treat gig workers as employees.

New Jersey-drafted Laws

New Jersey introduced a new law regarding employee misclassification in July 2021. As per the new law, employers making the mistake of misclassification of employees as independent contractor, will be identified and penalized. Further, the state laid the foundation of the Office of Strategic Enforcement and Compliance, as a constituent body of the Department of Labor and Workforce Development. It will inspect cases of misclassification of workers, and take actions against the erroneous employers.

New York-drafted Laws

New York’s “Establishing Protections for Freelance Workers Act” brings with it a unique approach towards the protection of the rights of contractors. This freelancer-focused law offers some notable rights to the contractors. It mandates the provision of a written contract, timely and full payment, and safeguarding from retaliation to all the freelancers.

The law also prevents companies from limiting the rights that are due to the contractors. In case of violation of rights, contractors can file complaints with the Office of Labor Policy and Standards or OLPS which then intimates the hiring entity. It has to send a response to the authorities within 20 days. Following which, suitable measures will be taken to address the issue.

How can Workers Report a Company for Employee Misclassification?

Before reporting a company for misclassification of employees, workers need to ensure that they have acquired a basic understanding of the conditions that lead to the violation of workers’ rights. Once they verify that their suspicion is not baseless, they can visit the local government website to get acquainted with the procedure for reporting.

Workers in the US can use Form 3949-A by IRS to report their suspicion about violations of tax by a company. The form will record relevant information about the company that has evaded paying taxes by wrongly classifying its employees.

Workers can use websites such as Acas and Citizens Advice in the UK to lodge a complaint and gain support. Usually, it recommends both the parties to have a discussion about the conflict. In case of persisting disagreement, the worker can make a claim online on the Employment Tribunal.

Myths Surrounding Employee Misclassification

Having proper knowledge about employee misclassification is the key to busting the myths surrounding it. Together, let’s see how we can debunk some of the false claims associated with the classification of workers.

Only Employers Have the Right to Decide the Status of a Worker

This is not at all the real fact. Of course, it is the duty of the employers to classify the workers whom they are hiring. However, they don’t form the supreme authority of doing so. This is because the local government has defined the factors that determine the status of a worker. So, the employer’s classification is subject to scrutiny and audits. In case of worker misclassification, the employers would have to bear the brunt of paying penalties and facing legal consequences.

Depending upon the intent of the employer, the penalties of employee misclassification are decided. In case of honest mistakes, the employer may have to pay the back wages and evaded taxes. However, if it was a deliberate act on the part of the employers, the fallout can be scary.

Individuals Working Remotely are Independent Contractors

This is not the absolute truth. If independent contractors can work remotely, so can employees. Moreover, several companies all over the world are moving towards the creation of a hybrid workplace where employees have the option to work from office or home. Likewise, an independent contractor may choose to work on-site. The venue of working doesn’t determine the status of a worker. Therefore, in no way can an employee working from home be misclassified as a contractor.

Workers Joining as Independent Contractors cannot Get Converted to Employees

This is yet another misconception concerning misclassification of employees. An independent contractor may become an employee of a company if the employer finds their services to be impeccable. Employers may extend a permanent job offer to a contractor if they start realizing that their relationship starts showing signs of an employer-employee relationship. By doing so, the company can protect itself from penalties and reputational damage that come with misclassification audits.

If a Worker is Working Part-time, they are Independent Contractors

Contractors may choose to work for a firm corresponding to either part-time or full-time hours. The hiring entity cannot impose conditions upon the work schedule of independent contractors. Therefore, whether the contractors choose to dedicate a few or prolonged hours per day is their sole discretion.

Keep Employee Misclassification Risks at Bay with Asanify

If you are a business owner, it is obvious to look forward to building up your team of global contractors by aptly classifying them. So, to complete that overwhelming task, Asanify is here to simplify things.

Our end-to-end Contractor Management platform streamlines the entire process of hiring, paying, and managing contractors. Further, with our International Hiring Platform, you can easily hire contractors, irrespective of their base location.

Stay compliant with the laws of your local governing body by relying on Asanify’s Contractor Management Platform. Also, don’t forget to check out our Invoice Generation Tool to ease all your tasks related to disbursal of contractor payments.

Click here to book a demo now! Watch us roll into action in seconds.

Simplify work and life, both at the same time with Asanify! Bid adieu to the constant stress of falling in the tangles of a lawsuit concerning employee misclassification.

Click here to let us help you retain the valuable monetary resources and image of your company from the onslaught of employee misclassification risks.

FAQs: Employee Misclassification

1. What is a misclassification of wages?

When employers classify employees as independent contractors, the latter don’t get access to overtime wages or rest breaks. As a result, employees are provided with wages lesser than they deserve. So, effect on wages is one of the consequences of misclassification.

2. Is employee misclassification an unfair labor practice?

Employee misclassification is an unfair labor practice, as the laws of various governments mandate. So, if any company is found to be wrongly classifying its workers at the time of misclassification audits, stringent actions are taken against the employers. These include the imposition of hefty penalties and even filing of lawsuits.

3. How do you fix misclassification?

You can fix employee misclassification by paying back all the affected parties the compensation they deserve. The parties coming under adverse impact of employee misclassification include workers, local governments, and tax regulators. Therefore, make sure you that you are paying the back wages, evaded taxes, employee benefits, and other penalties as demanded.

4. What are the 3 factors that can determine if you are a subcontractor?

The IRS in the US considers these 3 factors to determine if a worker is a subcontractor. These factors include: Behavioral control, Financial control, and Relationship of the parties involved.



Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.