PSC Blog - Contractor Misclassification Risks and Labor Law Compliance

Employee Misclassification: Avoid jail time by knowing the rules

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The Federal Contractor Misclassification Initiative Demands Your Company's Attention!

Penalties

What do workers rights have to do with your company? If you have any independent contractors or consultants working for you, not knowing the answer to that question can leave your company on the hook for more than just financial penalties.  It could mean jail time if you don’t know the law. As recently as January 2012, a construction company owner in Massachusetts was sentenced to two years in jail for employee misclassification. While stories of large corporations paying massive fines are now commonplace, prison sentences are relatively uncommon. That’s changing.

Government Willingness

The Obama administration in the United States is looking for new revenue streams and is targeting the misclassification of independent contractors and consultants. Billions of dollars in retroactive federal and state taxes are at stake as are back payment of wages and benefits. Many states are also jumping on board as they see this as a way to bolster budget deficits in these recession years. California and Massachusetts are two states that have been and continue to be particularly aggressive.

Personal Liability

The State of Massachusetts has used Newton Contracting Company, Inc. as a signal that they are serious about pursuing these laws. Owner Shaun Bryan was personally found guilty of wilfully engaging in these practices and thus the jail sentence was imposed. The message is clear: whether a company’s lack of compliance is on purpose or not there will be strict consequences. Incarceration is not as likely if a company has been found to be making an honest mistake, but there is no escape from major monetary penalties. And individuals can be found guilty along with a corporation.

Audits

Each state has their own tests that need to be satisfied for employee classification and these are often narrower than federal criteria. This can be an ongoing headache for any human resources personnel. And when you factor in that it doesn’t matter if the errors are intentional or not, it adds stress and increased workload. The Wage and Hour Division from the Department of Labor in the U.S. is expected to complete over workplace audits for misclassificationthis year alone. Absolute clarity is needed to mitigate contractor risk.

So how does this affect Canadian companies? Our next post will deal with how the Canada Revenue Agency is treating this issue and what it means for human resource management.

...because a PEO service company substantially reduces the risks your company faces.