Misclassifying employees

The Consequences of Misclassifying Your Employees

It is easy to forget about the significant role employment law plays in the cultivation and management of a business. If neglected, there can be many legal repercussions that can result in action against you and your company. In our last blog, you learned how to classify your employees correctly, and the common misconceptions construction businesses make when classifying their workers. Today we will go over the consequences you can face if you do not correctly classify your construction workers and real-life horror stories we have dealt with here at The Cromeens Law Firm.

Misclassification Consequences

If you misclassify your workforce, you could face any or all of the following repercussions:

  • Payroll/Federal tax violations and/or IRS audits
  • Wage and overtime lawsuits
  • Exponential penalties in a wage/overtime lawsuit
  • Collective action lawsuits
  • A Department of Labor (DOL) investigation

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If a worker has been misclassified, and you are not paying the worker as an employee, this means the IRS has not been receiving the payroll taxes for that employee. Since we know the government does not like being deprived of money owed to it, the IRS may then perform an audit on your company leading to more time, expense, and headache on your part—as well as an order to pay the taxes you failed to pay the first time around. 

You could also have a wage and overtime lawsuit filed against you. Not only would you have to pay an employment lawyer to defend you in this case, but you would also owe any unpaid wages and overtime to the plaintiff for the two years preceding the filing of the lawsuit. 

The calculation of damages does not stop there, however. Once the calculation of unpaid wages and overtime owed to the plaintiff is complete, the law requires the number to be doubled. There are exceedingly rare circumstances in which you can prevent this from happening, so chances are the nearly automatic doubling will happen to you. On top of this number, you would also be paying for the plaintiff’s attorneys’ fees. 

Further, there are increased penalties if a second wage/overtime lawsuit is filed against you. If you are caught violating the wage and overtime laws a second time, the penalties can increase by up to 33 percent. Not only could you face a lawsuit brought by a current or former employee, but the law allows for employees to band together and join in one giant lawsuit or collective action. Essentially, one plaintiff files a lawsuit, and then they are entitled to look at your records for each worker who performed the same job duties as they did. Then, a notice would be sent to each worker in the same job position telling him or her how to join the lawsuit. 

Another problem you would face is an investigation by the Department of Labor. The DOL can initiate their own investigation into how you pay your employees and then issue a ruling forcing you to pay them the amounts owed. The DOL will then hold onto your money, waiting for each of the affected employees to pick up or claim the money.

The Cromeens Law Firm is here to protect you and your business. Our hope is that you never get stuck in a legal battle because you were not adequately informed or prepared. Work with us to equip yourself with the knowledge you need to protect your business and your hard-earned money.

Real-Life Examples

One of our clients had an employee who called the US Department of Labor asking questions about how he should be paid. The Department of Labor decided to open an investigation into our client’s business and found that approximately twenty employees were paid incorrectly. The Department of Labor then produced a calculation for the amount each employee was owed and ordered our client to pay that amount. The Department of Labor then reached out to each employee, informing them of the money owed. The most frustrating part was—even if the employees never responded to the Department of Labor or never went to pick up the money—the Department of Labor kept all the money. 

In another case, one of our clients allowed each employee to choose whether he or she wanted to be classified as an independent contractor or employee. Most of the workers decided to be classified as independent contractors. One of these employees, let’s call him John, ended up being injured on the job and contacting an employment attorney. That attorney figured out that John was owed overtime and filed a lawsuit against our client. Then, notice was sent out to more than 50 of our client’s employees, and each one was given the opportunity to join into the lawsuit, putting our client at risk of a six-figure damage calculation. 

These lawsuits can be overwhelming and continue to snowball in a way that has the potential to put a smaller company out of business. However, there is good news on the horizon. As of mid-January 2021, a federal court changed the process by which all additional employees would receive a notice and join the lawsuit in a way that favors the employer. Now, the employer is more likely to be able to narrow down the class before notices are sent and push the class certification down the road.

Because of this, instead of it happening in the first few months, it can be 9–12 months down the road and make the potential class of employees much smaller. Of course, we are not entirely sure of how this will practically play out. It does seem as if the courts have attempted to level the playing field, but preventive education and practices are the best way to be prepared and protect yourself. 

Conclusion

No one wants to get stuck in a legal battle because they were not adequately informed or prepared. Understanding the full ramifications of neglecting employment law, and misclassifying your workers, is a necessary skill to fully comprehend in order to protect your business. This month’s blog series will continue to cover the long and short of employment law, so continue to stay tuned for another blog next week.

And for more help protecting you, your business, and your hard-earned money, contact your friendly employment lawyers at The Cromeens Law Firm. We are here to help you build a better business and educate you on the front-end. Don’t forget to sign up for our Employment Dos and Don’ts webinar next week, June 23 at 12 PM CST. Kelly Stamy is presenting and ready to answer any and all employment law questions you may have!