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Importance of Proper Employee Classification

by Tim AustinJune 13, 2017 8:00 AM

There are several employee work classifications covering everyone from full-time workers to special classes such as interns. Each person needs to be sorted into their appropriate groups to help determine their benefit eligibility.

However, there are occasions where employees can be incorrectly classified. The government takes this issue very seriously. The Society for Human Resource Management writes that proper employee classification “make[s] sure that all legal requirements are maintained so that there is no discrimination in terms of benefit plan eligibility and payment of compensation in accordance with federal and state laws.” It’s important to know how misclassification works and just how much it can hurt your business.

Image of warehouse workers. Learn about the dangers of employee misclassification.

How Employee Misclassification Happens

The biggest issue with misclassification is that some owners don’t know how to list someone when it comes to their manual class. The difference between employees and subcontractors is an important distinction, but there are many different classifications that can trip up an owner.

For example, the Ohio Bureau of Workers’ Compensation lists the 8810 classification as the standard exception for clerical office employees. If a business owner classifies an employee under 8810, but that employee spends 50 percent of his time in an office and 50 percent of his time in a warehouse operating tow motors and moving boxes around, the employee should not be listed as an 8810. He should be classified as a warehouse worker. 

The improper classification can have a major impact on benefits, compensation, and other costs, especially if it’s an issue of misclassifying an employee as an independent contractor. Misclassification can lead to employers dodging certain expenses, including:

  • Overtime
  • Social security and Medicare taxes
  • Employee benefits (paid time off, etc.)
  • Unemployment compensation tax
  • Workers’ compensation insurance

Whether misclassification is due to an honest mistake or an intentional effort to skirt legal requirements and costs, it’s an offense that can end up hurting a business. 

The Costs of Misclassification

Remember the example where an employee was misclassified as a clerical office worker? If the BWC audits the company and discovers the misclassification, that company can expect some serious financial consequences.

There isn’t a definitive figure or amount that is used for every case. Instead, penalties are based on the severity of the situation and how big of a gap there is in the classification rates. These penalties can come in multiple forms, including:

  • The collection of unpaid wages
  • Back taxes
  • Additional penalties for failing to deduct and withhold taxes for misclassified employees
  • Punitive damages from lawsuits for unpaid wages and taxes

There are also other drawbacks to misclassification. Once a business is caught misclassifying an employee or employees, they’re known as a potential repeat offender. That offense raises a red flag for the Department of Labor and OSHA which leads both organizations to target that business. Like how steroid users are regularly tested in Major League Baseball, offending businesses can expect regular audits to make sure that they’re complying with the law.

Partner with a PEO to Prevent Misclassification

Making sure your employees are properly classified is difficult when you’ve never heard of things like the 8810 classification or any other important identifiers. It can take a lot of time to learn all the appropriate classifications, taking you away from core business tasks. And there’s always the chance that even after all that studying, you can still make a costly mistake!

That’s why many business owners turn to a Professional Employer Organization to help them avoid misclassification issues. Contact GMS today to learn more about what our experts can do to keep your company compliant so that you can avoid costly penalties and stay focused on growing your business.

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