Independent Contractor Misclassification: Risks and Best Practices

What is Independent Contractor misclassification?

Contractor misclassification occurs when a company incorrectly classifies an individual as an independent contractor rather than an employee. This can happen for a variety of reasons, including a lack of understanding of the legal distinctions between the two, or a desire to avoid the costs associated with hiring employees.

Understanding the differences between Employees & Independent Contractors

To avoid the risks of contractor misclassification, it’s important for companies to understand the legal distinctions between employees and independent contractors. Here is a summary of the key differences:

Distinctions between independent contractors vs employees

What are the risks associated with Independent Contractor misclassification?

There are many risks associated with contractor misclassification. These include:

Substantial Back Taxes: Companies can be held liable for unpaid national, state and local taxes.

Back Benefits: Misclassified contractors may be entitled to benefits such as worker’s compensation, medical insurance, vacation, and sick pay, all of which can be costly for a company.

Legal Action Against The Company: Misclassified employees may be able to sue for back pay and other damages. The company may also be subject to penalties and lawsuits from government agencies if they suspect intentional misclassification of employees. This can lead to significant legal fees and financial difficulty.

Potential Damage to the Company's Reputation: This can affect market reputation, worker morale and limit attractiveness to future prospects.

Best practices companies can adopt to avoid the misclassification of contractors and mitigate risks

Companies should:

1. Partner with a global employment platform who understands compliance requirements in countries around the world.

2. Have clear and well-defined agreements in place with their contractors which follow local labor laws. The agreement should outline the terms of their engagement and the rights and responsibilities of both parties. It’s also important to keep accurate and detailed records of contractor relationships, including the compensation and benefits provided. (Thera can help with this)

3. Use an employer of record in countries with high misclassification risk. Thera can serve as an employer of record in over 135 countries around the world.

In Conclusion

Employing talent in global markets requires due diligence to avoid misclassification of independent contractors and the associated risks. By working with a global employment partner like Thera, you can continue your global expansion with confidence, without the worry of facing misclassification.

Thera’s all-in-one HR platform allows companies to quickly and compliantly hire a global workforce in more than 135 countries. Click here to find out more about hiring, paying, and managing your remote workforce

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Elizabeth Wellington

Liz writes about business, creativity and making meaningful work. Say hello on Twitter or through her website.