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How to Avoid Misclassification Lawsuits

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A lot of Americans work as an independent contractor or freelancer. The Government Accountability Office reports that these workers equal at least 40% of the American workforce. These freelancers are part of workforce planning for at least 90% of firms in the United States. Most of these freelancers, who are considered to be part of the ?contingent workforce,? work full time. Nearly 70% report they do this. Hiring independent contractors makes sense for companies, they save a lot of money in benefits. They also do not have to supply the worker with office space or the equipment they will use to do their job. These companies have to be careful to avoid misclassification lawsuits.

Misclassification lawsuits can be brought when a company treats someone like an independent contractor when they really are employees. Independent contractor misclassification is a breach of labor law. The Internal Revenue Service (IRS) has teamed up with the Department of Labor to crack down on this practice. Companies who are found to be doing this will have to pay back taxes and any overtime compensation the employee would be due. They also run the risk of being the target of class action misclassification lawsuits from former employees.

Businesses can avoid misclassification lawsuits by doing the following:

  1. Know the difference between an employee and independent contractor. An independent contractor sets their own hours, provides their own equipment, may have other clients and is paid by the project, not by the hour. If you set the person?s hours, provide space to work and equipment to complete it, pay by the hour and prohibit them from taking on other clients, they are an employee. There are other criteria but those are the basics. Also, if you have hired someone to perform certain duties and treated them as an employee, you cannot hire someone to do the same thing and classify them as an independent contractor.
  2. Get clarification if you are unsure. You have too much to lose if you make a mistake with your workforce management. The threat of misclassification lawsuits may be the last thing you need to worry about, given how much you may have to pay in back taxes. It is worth your time to talk to the IRS before you hire someone as an independent contractor. It should give you more peace of mind knowing you are doing the right thing by your workforce.
  3. You may want to consider working with an employee leasing company. To avoid misclassification lawsuits, some businesses contract with employee leasing. This is an arrangement where a leasing company hires staff and you contract with them to have those people work in your company. They are officially employees of the leasing company but you direct all the work they do.

At the end of the day, you need to protect your business from misclassification lawsuits. This will make your business stronger.

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