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How misclassifying an employee can hurt your business

Federal and Minnesota law both require employees to receive certain benefits based on their employment classification. A worker's status determines whether he or she is entitled to overtime, health insurance and other benefits. As an employer, you could experience financial losses due to a classification error.

In many instances, the misclassification may occur due to an honest mistake, but there are cases in which employers will intentionally fail to properly classify an employee in an attempt to avoid providing the benefits and compensation a particular employee deserves. If you are just starting a business, you may want to do your homework before hiring your first employee.

What the employee loses

When an employer fails to properly classify an employee, that worker loses the following:

  • Overtime pay
  • Access to workers' compensation insurance
  • Access to unemployment benefits
  • Employment benefits such as paid time off

The employee also loses payments that should go into paying for Medicare and Social Security benefits. All of these costs would be borne, at least in part, by the employer if properly classified.

What you could lose

The employee isn't the only one who loses when a misclassification occurs. You could also pay the price as well through the following:

  • Assessment of back taxes
  • Payment of unpaid wages
  • Assessment of punitive damages in lawsuits
  • Assessment of penalties for failure to withhold and deduct taxes

No formula exists for exactly how much you could end up paying for not properly classifying an employee. The circumstances dictate the amounts you could face. In addition, if any litigation is filed against you, the outcome is never guaranteed for either side.

However, you may have already surmised that you could end up being more closing watched by federal agencies such as the Occupational Safety and Health Administration and the U.S. Department of Labor, along with the applicable state agencies, when it comes to misclassifying employees. These agencies could interrupt your routine business operations with audits on a regular basis.

Help with classifying employees

Whether you are just starting a new business or looking to add more workers to an existing one, it might be in your best interests to do your research in order to avoid potential trouble when it comes to this issue. Gaining an understanding of the applicable laws and rules regarding classifying employees may be a good start. In order to avoid any misunderstanding, it may be a good idea to make use of the legal resources in your area.

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