Consequences of Misclassifying an Employee as an Independent Contractor

With the new overtime rule coming on December 1st, employers may be tempted to switch their exempt employees to independent contractors to avoid paying overtime or the minimum salary of $47,476 per year. However, employees need to be wary of the consequences when misclassifying an employee.

The consequences of misclassifying an employee include potential fines and awards. Mislabeling an employee as an independent contractor creates potential liability for employment taxes and penalties, unpaid wages that include overtime, and workers’ compensation liability.           

Furthermore, misclassification of an independent contractor is strictly prohibited. Willful misclassification is defined as knowingly avoiding employee status for an individual and then misclassifying them as an independent contractor. Challenges on the legitimacy of an independent contractor relationship commonly arise from filing for unemployment insurance benefits because one is ineligible if they was not an employee. Other ways these challenges surface are from claims for unpaid wages, claims for workers’ compensation, charges of employment discrimination, or investigations and audits by government agencies such as the IRS, the DOL, the EDD, or the DIR.

If an individual is willfully misclassified as an independent contractor when they should have been an employee, the employer is subject to civil penalties that could total up to $15,000 for each violation. If the employer is responsible for multiple violations, this amount could increase to a penalty of $25,000.