The ins and outs of worker misclassification, a guide.
First, let’s define the term.
You've probably heard the term worker misclassification a lot lately. So what is it? It refers to the practice of improperly identifying workers in a company as independent contractors rather than employees.
For employers, there are specific conditions that dictate differences between types of workers. But, these rules can be surprisingly difficult to pin down. In some cases if a worker is misclassified, employers avoid certain taxes such as unemployment insurance, and aren’t on the hook to provide company benefits available to full-time employees.
Whether you're an employer, or you build software to serve employers, it's important to understand why worker misclassification happens, and how you can help prevent it. In our latest ebook, we explain some of the nuances around classifying workers, and how these rules have changed in recent years.
Classifying workers is harder than you might think.
The rules dictating worker classification are not always straightforward. State by state, there are different regulations. Layered on top of these, there are federal regulations. And all come with potentially hefty fines for non-compliance.
The big challenge for employers is in determining which regulations they should follow.
The Internal Revenue Service has one set of regulations. The Department of Labor has another. And some states follow what’s known as the ‘ABC’ test – a set of three interrelated criteria that must be met to determine whether a worker should be considered an employee or contractor.
In October 2022, the US Department of Labor (DOL) proposed new regulations to provide guidance on worker classification. If enacted, it’ll mean employers will have to provide more 1099 workers with the same legal protections and social benefits that their W-2 employees now have, such as minimum wage, overtime, unemployment insurance, worker’s compensation, and the right to unionize. For some employers, this could mean an estimated increase of 20 to 30 percent in operational costs.
It's also important to understand why misclassifying workers can impact the workers themselves. Though people don't always agree. One view holds that contractors prefer to remain independent because it gives them more freedom and flexibility over where, how much and when they work. The other holds that workers should have rights and protections concerning their wages and benefits. Both are valid arguments, which is one of the reasons the debate is gaining so much attention.
Our latest ebook helps to spell it out.
Whether you directly employ workers, provide talent matching, or even build software to help employers run their business, it’s essential to know all the landmarks to navigate the regulatory terrain successfully.
In our latest eBook, we provide some background on the state of worker misclassification today, and identify five key considerations for employers. You can view it here.
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