Employee Misclassification is one of the most hotly debated topics around recruitment, onboarding and hiring. One thing is agreed – employee misclassification is a huge risk, and enterprises don’t want to end up with penalties and fines levied by the IRS if they get their employee classification wrong. Unfortunately, there is a lot of misinformation out there!
Here we’ll share five of the most sticky myths around employee misclassification, and the truth that could impact your compliance.
Myth 1: The Contract Determines Worker’s Status
“If I make it clear that this worker is a freelancer in the initial contract, I’m covered.”
Many enterprises hire a new worker, and engage in a freelancer agreement or contract, assuming this has them covered. They will include clauses such as “It is expressly agreed that the contractor is acting as an independent contractor and not as an employee.” Moving forward, no matter what work, hours, or arrangement evolves between the parties, the enterprise continues to treat the worker as a freelancer.
Reality: Legal Standards Over Contractual Agreement
Employee classification is not about your contractual agreement. The IRS sets out clear legal standards for determining who is a freelancer and who is an employee, and the same worker can start out as a contractor and become an employee, without any change to documentation. Start by considering the common law rules laid out by the IRS. These are:
- Behavioral, looking at whether your enterprise controls how the worker completes their role
- Financial, covering who sets the salary and whether the worker receives expenses reimbursed
- Type of Relationship, isolating details such as if the work is ongoing, integral to the business, or if the worker is being given benefits.
Myth 2: Part-time Workers are Always Contractors
“This worker only provides services a couple of days a week, so they are a contractor, not an employee.”
It’s common to hear part-time workers called contractors, especially if they only work a very limited number of hours for your enterprise. Part-time workers have set hours that they work for your organization, and a clear job description for the tasks that they are paid a salary to complete. If they cannot come into work or continue with their role, they will need to speak to an assigned manager, give notice, and end the arrangement. Despite the enterprise having clear financial and behavioral control over their work, and the type of relationship being open-ended and integral to the business, many enterprises call them contractors.
Reality: Part-time Status Doesn’t Determine Classification
How many hours an employee works is irrelevant to their employee classification. Technically, you could have a part-time employee on staff that works one hour a week, performing an essential task for your business. The determining factors for whether they are an employee or not would be considerations such as whether you set their salary, working hours, and ways of working, whether it’s a task-based or open ended relationship, if they work for other clients in their own trade, and whether they have the freedom to turn down work without it impacting the long-term relationship.
Myth 3: If the Worker Agrees, Employee Misclassification Isn’t an Issue
“My worker is fine with being a freelancer, in fact they prefer it that way.”
Freelancer misclassification rules were set up to protect independent contractors from enterprises that unlawfully hire them as contractors in order to avoid paying benefits such as sick leave, vacation pay, parental leave, and more. Many enterprises believe that as long as the freelancer is happy with their remuneration and the relationship – there is no problem designating them as an independent contractor, even if they are engaged in a 40-hour work week with the business.
Reality: Legal Consequences Regardless of Worker’s Agreement
It’s not up to the individual worker to decide whether they are an independent contractor or an employee. It’s not even up to the enterprise! As we outlined above, there are strict legal guidelines that define whether a worker should be classified as an employee, and it doesn’t matter whether they are happy to be a freelancer. After all, the government also loses out on employer contributions and taxes when an employee is wrongly classified, and this isn’t something they are going to let slide. If you’re not sure whether your worker is an employee or a freelancer, you can ask the IRS to make the determination for you using form SS-8.
Myth 4: Small Businesses are Exempt from Classification Rules
“I only hire a handful of workers. Classification rules don’t apply to me.”
This myth probably stems from rules around providing health insurance and other benefits. Businesses with fewer than 50 FTE employees are not legally bound to provide health coverage for their workers. The same is true for parental leave, where small businesses are not bound by the Family Medical Leave Act, which allows up to 12 weeks of leave after having a baby. As employment laws are known to be complex in America, it’s easy to see why many enterprises think that they do not have to worry about classification if they have fewer than 50 workers in place.
Reality: Classification Rules Apply to All Businesses
You can have one person working for your organization, and still misclassify them, leading to fines and penalties from the IRS. Classification is not related to how many people you have working for you. Even small businesses with under 50 workers need to be sure they are classifying workers correctly. If you have inadvertently been classifying employees as contractors, you can limit fines and penalties by applying for the Voluntary Classification Settlement Program, a great way to grab a clean slate.
Myth 5: Remote Workers are Automatically Independent Contractors
“My workers live in another country! I never even see them. How can they be employees if they aren’t in the office?”
The more control an enterprise has over the way an individual works, the more likely they are to be an employee rather than a freelancer. That explains why many enterprises believe that someone needs to work in the office alongside the rest of the team in order to be an employee.
Reality: Worker’s Location Doesn’t Determine Classification
Location might be a single factor that the IRS considers when determining classification, but it’s not a deciding one. Today, 22 million people in the United States work from home all of the time. More relevant for classifying workers is whether they work using the same tools or time zone as colleagues, if their work is integral to the core business, whether they are engaged in an independent trade or business of their own, and if they set their own rates.
Get Classification Right from Day One with Fiverr Enterprise
One of the most stressful things about workforce classification is that it’s often a moving target. Even if you onboard a freelancer compliantly, their status may change. Compliance can become a constant headache for any business.
At Fiverr Enterprise, we take this load off your mind altogether, with automated workforce classification audits that use AI to analyze each freelance relationship you have.
When a high-risk relationship has been identified, we generate a detailed report with steps for mitigation, so you’re never caught unaware. We make your legal documentation easy, take responsibility over your tax compliance, and get your teams out from under that mountain of paperwork.
Schedule a 30-min call with one of our workforce experts, and see how it works for yourself.
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