How to avoid worker misclassification?

Globalization and technological advancement are significantly increasing the rate of businesses and hiring of workers overseas. However, the worker misclassification problem is affecting the recruitment and management of talents in several companies. Right from the company’s home country to foreign market, the proper classification of workers is essential. This guide will provide you with professional tips to avoid misclassification.

What do you understand by Worker Misclassification?

In recent years, big companies like Amazon, FedEx, Uber, Google, etc have all been filed with several lawsuits due to worker misclassification within and outside the United States. Due to difference in laws and government, worker misclassification penalties and definition varies from country to country. This is why companies need to study all laws before recruiting any worker locally or globally. 

Nevertheless, we must define what worker misclassification is all about. So, what is worker misclassification? Generally, worker misclassification simply refers to the act of identifying or classifying an employee in your company as an independent contractor. Worker misclassification involves a company denying legitimate employees of their rightful benefits, refusal to withhold and remit workers’ tasks, limiting the company’s control over the employer. 

Worker misclassification is seriously a great offense to the government and the concerned workers. The government has robbed of the employees’ tax obligations while the employees are deprived of their rightful benefits such as insurance, protections, special leave allowances, etc. 

Independent Contractors vs Employees

Independent contractors are individuals or agencies with sole ownership of their businesses/services, carrying out a contractual job for another company. They can be freelancers, delivery agents, etc. They are responsible for their tax filing, calculation, and remittance. Regarding work responsibilities, independent contractors can work independently relative to the contract’s terms and conditions. They independently make decisions on how the job will be done, the working hours, methodology, etc. Because of their extensive skillfulness and expertise, they Carry out the client’s project without any supervision or training. Ultimately, the employer company has no control over the activities and flexibility of the contractor. As for compliance, independent contractors must efficiently comply with all legal and tax regulations. Failure to do so will heap serious impediments on the company, and this will be accompanied by risks, audits, and penalties.

Conversely, employees are known to be the legitimate workers of a company whose work responsibilities and activities are all controlled and managed by the employer. The employer company controls, dictates, and supervises the working hours, roles, responsibilities, job description, and hierarchy, etc. The employees carry out jobs according to the company’s policies and ethics. They are entitled to salaries/wages, and benefits/compensations from the company. The employer also provides them with the necessary instructions, methodologies, and training needed in the execution of a particular job. The employer is also responsible for the worker’s tax calculation, withholding, and remittance. As for compliance, the employer handles all compliance risks and liabilities for its employees.

What is an Independent Contractor Misclassification?

The multibillionaire company, Uber, has faced series of lawsuits in recent years due to independent contractors’ controversies. Uber classified its drivers as independent contractors, meanwhile, the drivers had argued that they are been treated as workers because of the kind of control Uber exercises on them. Nevertheless, Uber has been losing most of the lawsuits filed against it because of the genuineness of the drivers’ complaints.

From Uber’s illustration, we can deduce that the severe risks attached to the misclassification of independent contractors. However, Let’s define the term, Independent Contractor Misclassification. Just like worker misclassification, Independent contractor misclassification is simply the act of identifying independent contractors as employees of a company or classifying employees as independent contractors. This involves an independent contractor been used/managed as an employee in an organization while being denied all the rightful benefits of an employee. 

How to mitigate Worker Misclassification risks?

Oftentimes, companies find it hard to differentiate between independent contractors and workers. This is a complicated uphill company struggle to work against due to the diverse ways employers view worker misclassification. Since worker misclassification is viewed differently by businesses in different countries, their compliance and workers’ management will also be different. To mitigate these problems, companies can engage any of the following solutions to their businesses:

  1. Global PEO or Employer of Record

A global PEO or an employer of record is an external organization that works with another organization in mitigating compliance and misclassification risks, ensure that safety management and fulfillment of employees’ compensations, payroll taxes, etc.

2. Efficiently Strategized Policies 

Developing an efficient company policy that will cover the proper management and engagement of either an independent contractor or an employee is another method of mitigating misclassification. The policy must clearly state the differences between an independent contractor and an employee. It should also indicate the nature of treatments the independent contractor will experience. Furthermore, the policy, contract, and terms of service must have legal backing from a legal adviser to reduce the associated risks. 

How to stay away from Misclassification Audit?

The increasing rate of workers’ misclassification in companies around the world has increased worker misclassification audits. Worker misclassification audit is how companies are placed in check and balance as soon as reports on workers’ misclassification surface. If employees are treated as independent contractors, they have the right to report worker misclassification. Once this happens, the company will have to undergo worker misclassification audits which can result in a negative media release, high-profiled lawsuits, heavy fines, bankruptcy, etc. To avoid the associated risks of misclassification audit, these four solutions will be a guide for you:

Build a team of Cross-Functional Professionals

Building a team of cross-functional professionals will safeguard your company from potential misclassification audits. Your team may comprise professionals from different sectors like law, human resources, finance, management, etc. This team of professionals will be charged with the responsibility of providing supports and advice to the company from their fields. They also monitor the activities of every unit in the company to avoid any misclassification claim or action. This team must be efficient and consistent in its activities to ensure that anything that can initiate a misclassification audit is blocked or prevented. 

Properly Classify Contractors

Although there is a general ECJ ruling regarding worker classification in Europe, each European nation has its legal obligations in classifying workers. The laws and penalties attached to workers’ misclassification in Germany differ from those in Romania. Thus, companies must learn, ensure and apply the necessary and required principles and criteria in classifying their workers concerning the binding rules and regulations in each country, state, and other government agencies. This is an important step that must be taken for each of these bodies because they all have different criteria in classifying workers.

 Require Hiring Managers to use a Written Contract

A further step to take to avoid misclassification audit is to use a well-written and detailed contract document. This document must clearly state the level of engagement, work responsibilities and relationship, mode of operation, etc between the client and independent contractors. This document must also be professionally drafted by hiring managers under the watch of a legal adviser. The document must be signed by the company and the engaged individual so that it can be used as evidence during audits. The document must clearly describe work obligations, communication strategies, flexibilities, etc, in the company. When this document is properly drafted and all terms and conditions are clearly stated, the company is a step away from avoiding misclassification audits. 

Don’t limit your Contractor’s ability to work for other Companies

When engaging the activities of independent contractors, employers must make sure that the contractors are not only restricted to work for their company alone. Avoid exercising absolute control on the contractor, such that the contractor won’t be able to take up jobs with other companies while working for you. This problem of contractors’ work limitation has caused many organizations, e.g. FedEx, serious problems in the past. Thus, companies must hire and work with contractors on neutral grounds like freelance marketplaces. Doing this will remove any form of restrictions on the contractor, and give them the flexibility of working with several businesses at the same time.

How WeHireGlobally will help you?

WeHireGlobally is a global PEO that provides EOR solutions that will help your company mitigate worker misclassification. WeHireGlobally presence in 150+ countries will make hiring talents an easy task for your company. All talents will be recruited by WeHireGlobally and will be allowed to work for your company. Thus, mitigating legal and tax compliance risks. At WeHireGlobally, we have experts that will prepare good policies, programs, and contracts for your employees.

How to avoid worker misclassification? FAQ

  • What are the penalties for misclassification of employees?

    Worker misclassification penalties include negative media, heavy fines and debt repayment, high-profiled lawsuits, bad reputation, etc. These penalties can cost companies up to several million dollars.

  • How can employee misclassification be reported?

    When employees or independent contractors are misclassified or mistreated, there are different ways of reporting worker misclassification in companies. Employees can report worker misclassification to the Labor Department, the internal revenue service, the state government, and other agencies like workers comp offices. They can also file reports to the Federal government tax and employment agencies. These agencies will request employees to file forms like SS-8, employment and tax documents, etc. The documents will be used to follow up and check the complaints.

  • What is meant by misclassification?

    Misclassification is the act of identifying/considering the workers of a company as independent contractors instead of employees. This involves denying employees of their legitimate benefits, excluding from payroll taxes, etc.

  • Hannah Kohl
    Hannah Kohl. Head of Customer Success. Has extensive experience in the HR and IT industries. Helped 100+ international clients to achieve their global goals.

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