The Cost of Misclassified Employees

This week the press had tons of stories about how hiring was up and the economy was on the rebound. I stumbled on a story that talked about how few people had filed for unemployment over the last month and discussed how temporary employees were increasing. Reflecting on those articles I realized that contract employment was on the rise as well.

It made sense. An employer could save some money by utilizing temporary and contract employees due to the employee cost being reduced making getting ramped in staffing more affordable. After all contract employees don’t require employee taxes (unemployment and work comp premiums) be paid.

BEWARE!!! Both state and federal governments are cracking down HARD on employers who incorrectly classify an employee as a contractor. The back unpaid income taxes, unemployment compensation and work comp premiums owed for misclassified employees will eat up any savings the practice may have provided the employer. Add to the fact that there are fines, and potential back wages, and the impact of misclassification of employees could cost a small business …everything!

President Obama has sought additional funding to target businesses who misclassify employees and the state governments are not far behind. There are more that 300 new investigators targeting businesses just looking to find misclassified employees. The fines and back wages often run into six figures.

Unlike so many other employment related issues, obtaining protection from the expensive risk of being caught with misclassified employees, is very easy and cost effective. If your business is in the area of Trucking/Transportation, Construction, Manufacturing, IT or Home Health Care, your industry is being looked at very closely. If your business is not one of these industries, you are not immune. Investigators are looking everywhere. When government budgets are so tight, any chance to recoup unpaid funds is high on the government’s priority list.

When was the last time you evaluated how all your employees were classified? When was the last time you reviewed the differences between and employee and independent contractor? When was the last time you thought about your employee hiring practices. 2011 is the year to get it done. Delay and the government just might do it for you at a very high cost, maybe the cost of your business. The cost of a professional independent review of your hiring practices is a fraction of the impact of fines and potentially the loss of your business.

Happy New Year!

Glenn Brown is the Co-Founder and Chairman of the Board of G & J Consultants, LLC. In addition to having directed the HR Department of a health care services company, Glenn is an attorney with 15 years experience assisting businesses of all sizes and industries in complying with employment and labor legal issues. G & J Consultants specializes in providing small and medium sized businesses with traditional HR services as well as compliance with employment laws and regulations.