Classify Workers Correctly: Employees vs. Independent Contractors
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Misclassification of workers is one of the most common – and most costly – issues uncovered during due diligence. Where a worker is misclassified, the employer may be liable for a penalty to the state, overtime, missed meal periods, missed rest periods, wage statement penalties and waiting time penalties, among other things. In a startup environment where workers often work very long hours, the damages can be significant.
BEST PRACTICES:
Err on the side W-2 employment when classifying workers – unless you can clearly justify independent contractor status with documentation. Ensure independent contractors meet IRS and state-specific legal tests (e.g., California’s ABC test, which presumes all workers are employees unless proven otherwise). This includes (but is not limited to) analyzing behavioral control, financial control, and the overall relationship between your company and the worker.
Provide W-2s for employees and 1099s for properly classified contractors.
Conduct a regular audit of your worker classifications. Don’t rely on old assumptions – review each role carefully as your business evolves and roles change.
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