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Best Practices for Avoiding Employee Misclassification

On Behalf of | Oct 10, 2023 | Business & Employment |

Employee misclassification can have serious legal and financial repercussions for businesses. Therefore, every employer needs to ensure they are following best practices in recognizing the classification of their employees.

Employers can avoid costly penalties and create an effective workforce by implementing certain policies and procedures.

The high cost of employee misclassification

Misclassification occurs when a company’s employee is designated an independent contractor. This can hurt the employee regarding benefits, wages, paid time off and workers’ comp coverage. Furthermore, it deprives the government of needed tax revenue and gives the company an unfair advantage over its competitors.

Consequently, the government severely punishes any company that misclassifies its employees, intentionally or accidentally. IRS penalties may include:

  • $50 fine for each unfiled W-2
  • 5% penalty of employees’ wages
  • 40% of FICA taxes not withheld from the employees and 100% of the FICA taxes owed by the employer

Furthermore, a business may find themselves subject to civil lawsuits.

To prevent employee misclassification, an employer should do the following:

  1. Understand the key differences between employees and independent contractors, such as the level of control an employer has over the worker’s tasks and how they are paid
  2. Conduct a comprehensive analysis that reviews the actual duties and responsibilities of each job
  3. Review agreements and contracts to ensure they accurately reflect the working relationship between the company and the worker
  4. Establish clear policies that outline the differences between employees and independent contractors
  5. Maintain detailed records for each worker that states work hours, job duties and payment

It’s also best practice to have everything reviewed by someone who understands the complexities of state and federal regulations. They can help ensure that your policies and procedures are legally sound.

Established 100 years ago, Quinlivan & Hughes, P.A., ranks among the oldest and one of the largest law practices in central Minnesota. The full-service law firm has growing legal teams in employment law, business law, government law, insurance defense, trust and estate planning, and general litigation. Learn more at