The misclassification of a worker can have a significant financial impact on a company. In 2015, FedEx settled a class-action lawsuit for $228 million with thousands of FedEx Ground drivers who successfully argued they were actually employees, not independent contractors, and as such were entitled to full benefits. In 2000, Microsoft agreed to pay $97 million for a similar claim.
In addition to potentially having to pay large settlements such as these, misclassification can result in crushing penalties from the IRS. These may include:
- A $50 fine for each Form W-2 the employer failed to file
- 1.5% of wages
- 40% of the FICA taxes that were not withheld from the employee
- 100% of the matching FICA taxes the employer should have paid
- A failure-to-pay taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability
The U.S. Department of Labor (DOL) may also levy additional penalties on unpaid wages and FICA contributions, and can impose criminal penalties and even prison sentences. States may also impose their own set of penalties.
In addition to penalties and legal expenses, intangible costs for misclassification cases include prolonged management team distraction and the potential loss of goodwill.
Reclassification and Workers’ Compensation
The catalyst of many classification lawsuits is a work-related injury by a contractor who does not have workers’ compensation (WC) coverage. An injured worker will typically consult an attorney, who first will attempt to determine whether the worker was properly classified. In most situations, a finding of misclassification is the only recourse an uninsured worker will have to recoup medical expenses and lost wages.
Settling a lawsuit with an injured worker may not be the end of the process for the contracting entity. The case may be referred from the courts to the IRS, DOL or other agencies, and the penalties and legal ramifications can escalate from there.
An additional layer of complexity is that WC claims and civil suits may be filed against not only the contracting entity but the labor platforms from which the worker was sourced. Both parties need to protect themselves from potential worker reclassification liability.
The Solution: 1099Policy
1099Policy helps contracting entities and labor platforms mitigate their risk of worker reclassification. We enable contractors to secure WC coverage, in their name, on-demand at the time of their assignment, with a convenient pay-as-you-go pricing model. This prevents a work-related injury from spiraling into a costly reclassification legal battle. We also offer liability coverage to cover any civil suits that may result.
In future blog posts we will examine in depth specific legal cases related to worker misclassification, and explore how partnering with 1099Policy could have avoided companies’ negative outcomes.