From the HR Support Center: What Are The Costs of Misclassifying Employees?

From the HR Support Center: What Are The Costs of Misclassifying Employees?

The cost of misclassifying employees will depend on several factors, such as how many employees are misclassified, how much extra money they would have been paid if properly classified, how the misclassification is discovered, and how your employees react to it.

Generally, if an employee goes to the federal Department of Labor and says they have been misclassified, the DOL will investigate, and they will very likely look at all your employee classifications. Any employee who the DOL determines should have been paid overtime in the last two years will be found to have been underpaid, and the organization will owe that money to the employee now (or three years’ worth if the misclassification is found to be “willful”). The organization will also owe them liquidated damages equal to the amount of money owed. So, if an employee should have been paid $2,000 in overtime, the organization will owe them $4,000. The organization will also owe taxes on those wages and interest on those taxes.

Additionally, many states have their own overtime laws, and in most cases the organization can be held liable under both federal and state law, meaning not only would the employee be owed double under the FLSA, but also any liquidated damages under state law (which could easily triple the original amount). And if you are in a state with late payment penalties, you could owe up to 30 days’ worth of the employee’s pay on top of the already discussed damages. There’s also a very good chance that the organization will be held liable for any related attorney’s fees – both your own and the employee’s.

Finally, there are potential federal civil penalties of $1,894 per violation (generally one penalty per misclassified employee), state penalties (which will vary), and in some cases the potential for jail time. As soon as judgment is rendered in favor of the employee, statutory interest will begin to accrue on the amount owed – generally 10% per year.

The costs associated with misclassification are steep. But we can help! The HR Support Center is chock full of guides and trainings that can help you ensure that all your employees are properly classified. Start by checking out our 2-Minute HR Trainings on the White Collar Exemptions, which are the most widely used among our clientele.

The HR Support Center is a service offered to Payroll Partners clients, and provides access to exclusive, industry-leading HR tools and resources, for just a few dollars a month. From employee handbooks, job descriptions and other commonly used HR documents, to up-to-the-minute law alerts, easy-to-understand state and federal law libraries, and unique training videos, the HR Support Center will help you effectively manage your HR compliance and employee relations needs.

Legal Disclaimer: Payroll Partners and/or the HR Support Center are not engaged in the practice of law. The content in this email should not be construed as legal advice, and does not create an attorney-client relationship. If you have legal questions concerning your situation or the information you have obtained, you should consult with a licensed attorney. Payroll Partners and/or the HR Support Center cannot be held legally accountable for actions related to this article.