Recently, athletics giant Nike made international news for more than just sneakers. A July 2022 report found that Nike may have misclassified thousands of contractors and could be facing fines in the hundreds of millions. But the financial repercussions of misclassification don’t stop with fines. Misclassified employees may be entitled to unpaid overtime, sick leave, paid time off, healthcare, and other benefits.
How can a giant corporation like Nike make such a massive, ongoing mistake? The answer lies in a lack of systemic review and classification of workers. The report found that, “There is currently no company-wide process for determining whether an independent contractor should be engaged as an IC or employee at Nike.”
While Nike is making headlines now, other major companies – including Microsoft, Uber, and FedEx – have faced lawsuits and hefty fines over misclassification. Why is this such an issue when there is a simple solution?
Mitigating the Risks of Misclassification
Protecting your company from lawsuits, hefty penalties, and – let’s face it, embarrassment – should be a priority. The fact is that many companies classify workers as independent contractors simply to save costs. This practice of avoiding the payment of employee benefits is illegal. The risk to your company’s reputation is higher than this temporary “reward.”
Yet even businesses who believe they are operating legally might be mistaken. Workers who are classified as independent contractors should have general liability insurance and, in some states, workers’ compensation insurance. They should be operating as a business, even if they are a single practitioner. If a worker is classified as an IC but is doing the same work as a W-2 employee, that is a red flag for misclassification.
The question of whether a worker is operating independently can only be answered on a case-by-case basis. Staying current with IRS guidelines and regulations from the U.S. Department of Labor as well as individual state law can be daunting. But being aware of, understanding, and operating within these laws is critical to mitigate the risk to the company.
The Simple Solution: Using a Payroll Provider
Working with a payroll provider is a simple solution to the challenge of proper employee classification. Like any service, there is a cost involved, but the protection your company receives more than pays off.
Amy Harkins, business development director at Checks and Balances, Inc., says, ” The upfront cost of engaging with a payroll provider is a fraction of the misclassification fines and retribution these companies are facing. Having experts involved in the strategic planning and vetting of your workforce is paramount to protecting your company.”
A provider that specializes in workforce solutions – like Checks and Balances, Inc. – can support your company and mitigate the risks involved with misclassification. Their proprietary vetting process accurately classifies workers based on the laws and regulations that govern each worker’s location.
For W-2 employees, this includes providing the legally required paid sick leave, paid time off, and mandated benefits. It also ensures that the correct taxes are applied to each worker, no matter where in the United States they are located. For independent contractors, the process evaluates their ability to operate as a business and protect themselves as well as your company.
Don’t end up like Nike. Explore the payroll provider relationship, whether for W-2 employees or independent contractors, and give your company the protection it deserves.