What is Employee Misclassification?
Employee misclassification refers to the improper categorisation of employees as independent contractors. This occurs when an organisation works with a worker on a full-time basis through a commercial contract rather than an employment agreement. This kind of mistaken classification of a worker's employment status can lead to potential legal and regulatory issues.
Classifying workers as independent contractors rather than employees impacts many aspects and terms of work, which is why it has to be treaded with utmost care. Correct classification is essential: Classifying your employees incorrectly – whether advertently or inadvertently – can be a costly mistake.
Proper classification is essential because independent contractors do not have the legal rights, responsibilities, and entitlements that are given to employees under employment and labour laws. That, however, is counteracted by the level of freedom that genuine independent contracting receives. A classic example of employee misclassification is when workers are classified as independent contractors but have none of the freedoms that come with genuine independent contracting.
What is the difference between an ‘employee’ and a ‘contractor’?
At its core, an employer-employee relationship revolves around legally protected employee rights.
On the most basic level, employees work under the direct control and supervision of an employer. As such, employers are responsible for withholding portions of a worker’s earned salary to be paid in taxes and potentially other legal requirements, such as contributions to social security or healthcare coverage. Employees are covered by labour laws related to minimum wage, overtime, workplace safety, and anti-discrimination protections, and are generally entitled to a minimum number of days of annual leave.
How can an organisation determine whether a worker should be classified as an employee or an independent contractor?
There is a set of work specifics that determine whether a worker can be classified as an independent contractor over an employee. These vary from whether the worker has just one or multiple clients and the level of independence in how they perform work for them, through to whether they use their own equipment to complete their work or if they’re provided with equipment by the employer, all the way whether the worker can employ additional subcontractors to complete the work, and many other factors. These considerations play into how the government determines employee classifications.
Workers classified as employees are extended both mandated and non-mandated benefits, employee rights and protections, while their salary is subject to statutory salary deductions. Independent contractors, on the other hand, do not have the same protections in place that workers classified as employees have. They are responsible for paying their own taxes, social security contributions, and providing their own ‘benefits’. Likewise, they’re not entitled to the same labour law protections as employees. Their work is guided by temporary contracts and business agreements.
Due to the nature of their work agreements, independent contractors operate with full autonomy and have complete flexibility to determine their work schedule and methods compared to traditional employees. As such, what independent contractors do gain over employees is freedom. The level of this freedom is usually what authorities review and scrutinise to determine whether someone is rightly classified as a contractor or should instead be an employee.
Can a company hire long-term, full-time contractors?
The short answer is ‘no’.
To this day, businesses opt to hire workers as full-time contractors instead of employees which has allowed them to bypass many of the regulations created to protect workers, such as minimum wage, overtime pay, time off, access to benefits, and protection from unlawful termination. It has also allowed them to have lower labour costs in their profit and loss statements.
If an organisation is hiring workers for an unfixed amount of time – meaning the agreement does not have set start and end dates or does not pertain to a specific, time-bound project – the general expectation is that the workers should be hired as employees, not as contractors.
In cases where a company hires independent contractors, the written legal agreements may last for a short period or, depending on the country, up to a few years. For example, in Portugal, contracted, non-employee work agreements may not exceed 4 years.
What happens if an employee is misclassified?
Businesses that misclassify workers face serious potential penalties for failing to comply with tax and employment regulations. They may be required to pay backdated social security or pension contributions as well as retroactive salary, overtime, benefits, or other leave pay since the start of the employment relationship in addition to hefty fines and back taxes.
Some countries also place additional personal responsibility on company leaders. In the event a worker has been deemed misclassified, organisation directors may be fined or even imprisoned, as is the case in France and Germany.
Ensure you employ your distributed workers the right way with Boundless
Employing people the right way when they are giving you all of their time and attention is critical to maintaining compliance with employment laws and ensuring you treat your workers fairly. Boundless can help you review the factors that determine whether an individual should be classified as an employee or an independent contractor, handle the details of employment, and help you avoid misclassification.
Get in touch with one of our experts now.