As more companies take advantage of the benefits of the flexible workforce model, they must be diligent to remain in compliance with changing legal regulations or be exposed to unnecessary risks related to misclassification. In fact, a business that classifies an employee as an independent contractor but fails to meet all the regulatory requirements for that classification may find itself the subject of a Sarbanes-Oxley violation, a government tax audit or even a class action lawsuit.
And while it is ultimately the responsibility of the company to remain in compliance, independent contractors should also be aware of the importance of proper classification.
Regulations and Revenue
Cash-strapped governments now view misclassification as a potential source of revenue. The Department of Treasury has proposed more than $240 million for “new revenue-generating tax enforcement initiatives.” When fully in place by 2014, these new efforts are expected to yield about $1.3 billion a year in additional tax revenue.
California’s Senate Bill 459, which was signed by Governor Brown in October 2011, imposes civil penalties for “willful misclassification.” Penalties of up to $15,000 can be levied for each misclassified individual, rising up to $25,000 per violation if the court or agency determines there is a pattern. Willful misclassification is legally defined as “voluntarily and knowingly misclassifying.” While there is no justification for willful misclassification, a simple oversight or honest mistake could become a major problem.
The Penalties that Keep Giving
New California regulations also contain provisions that can quickly accelerate penalties. Through a series of memoranda of understanding, California state agencies share information among themselves and with other state and federal agencies, such as the IRS. Consequently, an action by one agency can result in penalties from multiple agencies.
Mitigating the Risks
Clearly, the perils of misclassification make it imperative that every business that uses flexible workers have an effective human capital management plan that mitigates legal exposure. Companies should make it their business to be aware and apply all measures to ensure compliance with the law, up to and including working with firms that have expertise in these areas. With the right management strategy in place — developed either in-house or with a partner — companies can enjoy the innovation, productivity, and cost savings of using the flexible workforce while minimizing any risk of non-compliance.