Why Do Employers Misclassify Their Employees?

Employee misclassification can lead to Department of Labor or the Internal Revenue Service fines depending on whether it is accidental or deliberate. Employers who deliberately miscategorize their workers do so for the following reasons.

Avoid Social Security, Medicare, and Employee Taxes

Employers must pay a portion of every employee’s Social Security and Medicare taxes, plus unemployment taxes. However, when employers miscategorize employees as independent contractors, they avoid these payments, burden workers with high self-employment taxes, and withhold the government’s vital funds.

Avoid Paying for Traditional Employee Benefits

Employee misclassification prevents workers from receiving critical benefits, including health insurance, pensions, and paid time off. Unfortunately, in addition to not receiving these desirable benefits, workers do not enjoy the freedom to decide where, when, and how they work for a company.

Prevent Union Organizing

According to the National Labor Relations Act, independent contractors may not organize as unions. Therefore, employers in union-dominated industries who do not want to risk labor strikes or demands may deliberately categorize their employees as independent contractors.

Hire Inexpensive Labor

The law states that all W-2 employees must be citizens or have work visas and receive their state’s minimum wage. Employers who hire non-citizens and illegal immigrants but label them as independent contractors can pay workers reduced wages while disqualifying them for employment law protections.

Accidental or deliberate employee misclassification occurs in all industries because employers hope to save money. Still, this practice can backfire and lead to severe fines.