Businesses have a legal obligation to their shareholders to maximize the profits that they generate. Unfortunately, the focus on making as much money as possible can sometimes put management at a company at risk of doing something illegal in their hope of keeping costs low and profits high.

For many businesses, staffing costs are one of the biggest liabilities they have. Taxes are another major expense, especially employment taxes. When a company hires someone, they have an obligation to pay certain taxes because of the labor they receive from their workers. 

Some companies have tried to pass that expense on to the workers at their company, an act that not only deprives their workers of income and violates federal law but which could also potentially constitute tax fraud if a prosecutor chose to pursue the issue.

What is misclassification?

Misclassification involves a company having a worker execute a 1099 instead of a W-2 and claiming that the worker is not an employee but an independent contractor while still treating them as an employee.

Businesses have seen independent contractor status as a means of minimizing their staffing costs for many years. The Affordable Care Act created another incentive by requiring insurance for workers who put in over a certain number of hours a week. Contractors aren’t entitled to the same benefits, nor does a company have to pay payroll taxes for those workers or carry workers’ compensation for them in many cases.

All of those expenses pass on to the worker, who will have to pay substantially more in income taxes and will either have to self-insure for workers’ compensation purposes or forgo coverage and risk losing out on their livelihood if they get hurt on the job.

The employees aren’t the only ones that misclassification effects

Having workers at your company listed as independent contractors instead of as employees can potentially save the business money in the short term by reducing insurance costs and taxes.

However, misclassification doesn’t just unfairly push costs off onto staff members. It also has broader social consequences, such as a strain on social safety nets caused by workers who don’t receive workers’ compensation protection. Those people may end up needing Medicaid or Social Security benefits if they get hurt and can no longer work.

Executives and owners at companies that improperly classify their workers could very well wind up accused of criminal acts as a result of that decision.