Employee misclassification can be a costly mistake

Employers must make sure independent contractors are aware of their classification status.

Employers must make sure independent contractors are aware of their classification status.

There can be advantages to hiring freelancers instead of taking on additional full-time employees. Hiring an independent contractor may help companies save money, because in this situation, the employer is not responsible for paying for certain expenses like office space, equipment and insurance. For example, when an independent contractor is hired, the company is not responsible for benefits, the employer's share of taxes, worker's compensation insurance or unemployment insurance.

Although the idea of saving on payroll costs may seem attractive, there are potential pitfalls that go along with hiring independent contractors. Freelance workers might cost less, but in order to successfully hire them, the correct paperwork must be completed, or there could be legal consequences. 

Employee misclassification is being cracked down on in New York. According to Crain's New York, 24,000 instances of misclassification were discovered by New York State's Joint Enforcement Task Force on Employee Misclassification in 2013. This means that $333.4 million in wages went unreported, in addition to $12.2 million for unemployment contributions.

Employers that have been found to have misclassified employees have to pay back these wages and may additionally receive penalties for their actions. Some companies may even end up being investigated for fraud. If a person that has been classified as an independent contractor files for unemployment, it may be a sign for the Department of Labor to investigate, because it could be an indication that the contractor believed they were classified as an employee, and therefore eligible to receive benefits.

The employee must be aware of how they are being classified before they are hired. This usually means drawing up a legal contract for the employee to sign, confirming their knowledge of their employment status. HR departments can use HR software solutions to keep track of important employee classification information to help safeguard against the chances of making a costly error.