Could you lose millions? The truth behind misclassification cases!

In recent years, there has been an increasing crackdown on worker misclassification, as more and more companies have come under fire for misclassifying their workers as independent contractors rather than employees.  

This misclassification can result in hefty fines, back taxes, and even lawsuits, which can be devastating for small businesses that are already struggling to stay afloat. Fortunately, an employer of record (EOR) can help solve these problems for companies by providing them with the resources and expertise they need to avoid misclassification and stay in compliance with employment laws.  

According to a report by the Economic Policy Institute, misclassification of employees as independent contractors cost the U.S. government approximately $3.7 billion in tax revenue each year. In addition, misclassification can result in companies owing back wages, unpaid overtime, and benefits to misclassified workers, which can be a significant cost to companies. 

Overall, misclassifying workers can be a costly mistake for companies, both in terms of financial penalties and damage to their reputation. 

An Employer of Record, or EOR for short, is a third-party service provider that acts as the legal employer of a company's workers. This means that the EOR services takes care of all payroll and tax-related issues, as well as employee benefits and compliance with labor laws for small and medium sized businesses. By using an EOR, a company can avoid the risks and legal complications associated with misclassifying their workers, while still maintaining control over their day-to-day work activities and saving time and money. 

The Consequences 

The misclassification of workers can have severe financial and legal consequences for employers. While hiring independent contractors or freelancers can be more cost-effective for businesses than hiring full-time employees, classifying workers incorrectly can result in lost taxes and potential lawsuits. 

According to studies, the U.S. government loses billions of dollars annually due to the misclassification of workers. Employers who misclassify workers as independent contractors instead of employees can avoid providing worker benefits and insurance, which can lead to significant cost savings.  

However, the IRS warns that companies may end up paying more in the long run due to this type of workplace corruption. 

Companies That Should Have Used an EOR 

Uber 

One company that could have benefited from using an EOR is Uber, which has faced numerous legal challenges over the past few years related to the classification of its drivers as independent contractors. In 2016, Uber settled a class-action lawsuit with California drivers for $100 million, in part due to the misclassification of these workers as contractors rather than employees. Uber has also faced similar lawsuits and penalties in other states and countries, which have cost the company millions of dollars in legal fees and settlements. 

If Uber had used an EOR to manage its drivers, it could have avoided many of these legal challenges. An EOR would have ensured that all of Uber's drivers were properly classified as employees, with all of the associated benefits and protections under the law. Additionally, the EOR would have taken care of all tax and payroll-related issues, reducing the risk of fines or penalties for non-compliance. 

Lyft 

In 2013, Lyft faced a class-action lawsuit alleging that the company treated its drivers like employees by exerting control over them, including the ability to terminate drivers without prior notice. Rather than going to court, Lyft opted to settle the case by agreeing to pay $27 million. 

FedEx 

Another company that could have benefited from an EOR is FedEx, which has been embroiled in a legal battle with the IRS over the classification of its drivers as independent contractors. The consequences of worker misclassification have grown over the years. In 2015, FedEx settled a misclassification case for $228 million, resulting from the company's practice of classifying and paying 2,300 Californian drivers as independent contractors, some dating back to 2000. The risk of misclassification also extends to staffing agencies that are tasked with sourcing contract workers for their clients.  

And again in 2020, FedEx agreed to pay $2.4 million to settle a lawsuit over the misclassification of its drivers in New Jersey. The company has also faced similar lawsuits and penalties in other states, which have cost the company millions of dollars in legal fees and settlements. 

An EOR could have helped FedEx avoid these legal challenges by ensuring that all of its drivers were properly classified as employees. This would have ensured that the drivers received all of the benefits and protections under the law, while also reducing the risk of fines or penalties for non-compliance. 

What Else? 

In addition to helping companies avoid legal challenges related to worker misclassification, an EOR can also provide a number of other benefits.  

For example, an EOR can help companies save money on payroll and tax-related expenses by taking advantage of economies of scale. Additionally, an EOR can provide companies with access to a wide range of employee benefits, including health insurance, retirement plans, and other perks that can help attract and retain top talent. 

The Fair Labor Standards Act (FLSA) was implemented in the U.S. to protect worker rights and ensure that employees had the right to a minimum wage, overtime pay, record keeping, and youth employment standards. Despite the implementation of FLSA, misclassification has continued, with the U.S. Department of Labor estimating that 10-30% of employers have misclassified their workers. 

Overall, an EOR can be a valuable resource for companies that are struggling with worker misclassification issues, especially when it comes to understanding of the laws. By providing expertise and resources that can help ensure compliance with labor laws, an EOR can help companies avoid costly legal challenges and focus on growing their businesses.  

While independent contractors and freelancers can be a cost-effective solution for businesses, employers must be cautious not to misclassify workers. The legal and financial consequences of worker misclassification can be severe, and companies must take steps to ensure that they are classifying their workers correctly. Employers should consult legal and HR experts to ensure that they comply with all relevant laws and regulations. 

The Solution to Your Problems 

If you’re looking for a reliable and efficient employer of record service to help manage your contingent workforce and help you avoid common misclassification issues, look no further. At TCWGlobal, we are confident that we can provide you with the top-notch service you need to take your business to the next level. 

Give us a call today at 858-810-3000 or send us an email at hello@tcwglobal.com to learn more about our services and how we can help you achieve your business goals. 

 We look forward to hearing from you and working with you in the future!