Companies and organisations are increasingly incorporating independent contractors such as freelancers, consultants and self-employed professionals into their workforces. Consequently, worker misclassification has become a major concern globally and across all industries where contingent talent is concerned.
This article answers the most frequently asked questions about worker misclassification and offers guidance for remaining compliant and avoiding risks when engaging and managing independent talent in your organisation.
What is worker misclassification?
Worker misclassification occurs when a company or organisation wrongfully classifies a worker as an independent contractor for tax and legal purposes when they should be classified as an employee. Worker classification is often complicated by the lack of a single official definition that stipulates the working conditions of an independent contractor. However, to remain compliant and avoid the risk of worker misclassification, companies need to understand the difference between independent contractors and employees.
In most regulatory regions, independent contractors are not considered full-time employees by law. A lot of workers are regarded as experts in their relevant industries, which means their work processes are less controlled by the contracting parties. In contrast, full-time employees are typically subject to the more rigid behavioural and financial control of the employing party, while being engaged in a permanent contract or agreement that may include additional employee benefits. The nature of a worker’s services also plays a role in classification. Services that are closely related to the core business of the company or organisation are more likely to categorise a worker as an employee rather than an independent contractor.
What are the risks of worker misclassification?
Reduced Government tax revenue’s, incorrect expense deductions, benefit deprivation and lack of employee protection are the most significant reasons for authorities to be concerned about worker misclassification.
Beyond these implications, worker misclassification could lead to substantial financial losses and reputation damage for companies while putting workers at risk. If a company misclassifies an employee as an independent contractor, whether intentionally or unintentionally, an audit or misclassification lawsuit may follow. Considering the possibility of fines, penalties, litigation expenses and worker settlements, worker misclassification is an expensive misstep in the workforce management process.
How can worker misclassification be avoided?
To avoid risks of worker misclassification, companies and organisations need to have centralised solutions in place for managing contingent workforces, especially when engaging workers in foreign countries. Outsourcing key points such as contract management, vetting, background checks, right to work and payroll can alleviate the risks associated with worker misclassification.
Enlisting the services of a Professional Employment Organisation (PEO) will ensure workers are classified correctly, set up properly and working in compliance with local and in-country laws. A global PEO can further assist in the development of policies and processes to effectively and compliantly manage independent workforces.
What is the status of worker misclassification in Europe?
The growth of the gig economy along with the rise of remote work increases room for unstable employment conditions among contingent workers. A report by Eurofound on fraudulent work contracting in the European Union showed that independent contractor misclassification is a major cause for concern in this region with nearly 80% of national correspondents reporting a significant fraudulent use of self-employment.
Several European countries including Serbia, Hungary, Romania and Poland are revising their independent contractor misclassification laws. While tax authorities in the UK and Netherlands have already established new legislation to reduce misclassification. Companies and organisations that engage contingent workforces in Europe and globally are responsible for ensuring their workers are compliantly managed to avoid risks of worker misclassification.
CXC is a global HR outsourcing organisation with 30 years of experience in workforce management. Our innovative and cost-effective solutions help companies gain a competitive advantage by improving efficiency while reducing risks.
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