Reasons employers may misclassify workers

The problem of employers wrongly classifying their workers is a big issue that affects the rights and benefits of employees. According to the Economic Policy Institute, as many as 30% of employers in California make this mistake.

This happens when employers accidentally or on purpose label their workers as independent contractors or freelancers instead of regular employees. There are various reasons behind this misclassification.

Cost savings

Employers may opt for worker misclassification as a means of cost-saving. When a worker is an independent contractor, the employer has no obligation to provide benefits, such as health insurance, paid leave or workers’ compensation. This cost-cutting motive is especially enticing to businesses seeking to reduce overhead expenses.

Tax avoidance

When employers misclassify workers, they might do it to avoid paying payroll taxes. Usually, employers have to pay taxes for things like Social Security, Medicare and unemployment. But if they say the workers are independent contractors, they make the workers handle those taxes instead.

Reduced legal obligations

Employees have safeguards under labor laws and regulations, including minimum wage, overtime and workplace safety laws. Misclassified workers may lose these essential protections, making it easier for employers to sidestep their legal obligations.

Industry norms

Certain industries have established norms of classifying workers as independent contractors, fostering a culture where misclassification happens all the time. Employers may follow suit without conducting a comprehensive legal analysis of such classifications.

Lack of clarity in regulations

Labor laws and regulations can be intricate. Employers may misclassify workers due to confusion surrounding legal definitions and classifications. Unclear guidelines can result in unintentional misclassification.

Liability avoidance

Sometimes, misclassification is a way to avoid taking responsibility. Employees usually have protection from workers’ compensation insurance the employer provides. Independent contractors handle their own insurance.

Competitive advantage

Some employers might use misclassification to gain an advantage in competition. They do this by reducing the money they spend on workers and avoiding certain rules, so they can provide products or services at cheaper prices. This could help them do better than businesses that follow the correct worker classification rules.

Worker misclassification is a multifaceted issue with various contributing factors. But it is an issue that requires attention to maintain a fair and equitable labor market.