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Misclassification of Workers Taken Under the Microscope

Phil Cohen

A number of states nationwide are passing legislation to sanction companies who willfully misclassify their employees to avoid paying the associated employment costs.

Tennessee, New York, and California are among the states passing laws to establish fines when misclassification is discovered. Many firms improperly classify their employees as independent contractors in order to pay lower wages and skirt overtime, insurance, and tax costs. A Treasury report from June estimated a revenue loss of more than $3,000 per misclassified worker, money that the state can only recover by performing a worker classification audit.

One such audit in New York showed $282.5 million in unreported wages from the more than 20,000 workers misclassified as contractors.

Improperly classified workers lose out on workers’ compensation, fair wages, overtime payment, and unemployment if they are laid off. Despite this, misclassification is an ongoing issue in industries where contractors and employees often work on the same jobs, such as construction, and many workers go along with it for fear of losing their jobs.

The IRS has a strict set of conditions for classifying workers as employees or independent contractors and emphasizes that the list is not exhaustive. Even workers who consider themselves independent and meet some of the IRS’ criteria are eventually reclassified and their “employers” subject to penalties. While companies who avoid using misclassified workers may pay more in the beginning, they will wisely avoid the fines that are becoming standard in many states.

If your company is in need of cash flow, there are better and safer options than worker misclassification. Invoice factoring can provide you with immediate cash to pay your expenses while allowing you to take on new projects and maintain a reputation for running an ethical business. Contact Factor Finders and let us match you with the right invoice factor today.

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Phil Cohen

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