Understanding the Risks of Worker Misclassification

Misclassification/Reclassification - a top five legal/regulatory risk for startups. Reclassification risk materializes when (i) regulators, like US DOL or state agencies, or (ii) private litigants, as in the recent case against Scale AI, claim a startup's independent contractors are "misclassified" and should have been hired, compensated, and treated as employees. Employee status comes with wage and hour protections, time off, and unemployment insurance, not to mention health insurance in many cases - all things that regulators love. Agencies and courts can retroactively "reclassify" workers as employees and then order the company to retroactively pay all federal withholding taxes and other payroll taxes the company should have paid into social security, Medicare, workers comp, unemployment insurance, and family/medical leave schemes, plus late fees and penalties. When an insolvent startup is hit with these tax delinquencies, the officers and directors are often held personally liable for these unpaid taxes, interest, and penalties. Washington State Dept of Labor hit each of two founders I know with $250K judgments. Cases like this are common and don't always show up in the news. Reclassification risks are greatest in the roughly 33 states that enforce some version of the "ABC test." Under many versions of the ABC test, workers are subject to reclassification as employees if they perform work "that is in the usual course of the company's business." If a startup creates websites for other companies, workers creating websites are likely doing work "in the usual course" of the startup's business. Marketing, bookkeeping, or gardening for the startup should not be viewed as in the usual course of its business. I put reclassification in the upper right-hand quadrant (danger!) of my "likelihood-materiality risk matrix," because (i) there is a high likelihood for disgruntled workers to make claims to regulators and (ii) regulators love these claims and pursue them aggressively, showing little sympathy or leniency for errant founders/officers/directors. As Scale AI found out, reclassification cases almost always involve other closely-related claims that look and feel even worse, such as "wage theft," which is an actual crime. Remember the tongue-in-cheek rule about violating only one law at a time. If you're going to hire contractors, don't abuse them. https://lnkd.in/gjHWTtvc How do startups avoid these risks? First, limit contractors to work that is outside the company's "usual course of business" and, when in doubt, simply hire workers as employees and pay them at least minimum wage, sweetening low wages with stock options when appropriate. Second, use an HR platform to ensure strict compliance with the ever-changing, pervasively complex payroll tax, wage and hour/overtime, and time-off regulations. https://lnkd.in/gAAW_9dk

General Contractors: If your “subcontractors” are wearing your company shirts, using your tools, and showing up on your schedule… You don’t have a 1099. You have an employee. Misclassification is one of the most common employment law violations in the construction industry. And it can cost you big. Here are some of the biggest red flags I see: ❌ Assigning daily tasks like you would with an employee ❌ Providing tools, equipment, and materials ❌ Having them wear your company-branded gear ❌ They introduce themselves as working “for” your company ❌ You dictate how, when, and what they do Let’s be clear: A true 1099 subcontractor runs their own business. They control their process, their schedule, their tools, and their identity. They’re a separate entity—not an extension of yours. Yes, it’s tempting to treat subs like your own crew. But if you're not careful, you’re exposing your company to fines, back wages, and legal action. ☑️ Do it right. ☑️ Classify correctly. ☑️ Build your business on a solid legal foundation. 📌 If you're in Texas Construction and want to future-proof your workforce Send me a DM - let's talk about hiring and growing your crew.

Employment Law Myth: My small business cannot afford a full time employee, so I can just hire independent contractors. Fact: Businesses and individuals cannot choose a label of “employee” or “independent contractor” based on preference. The classification of the worker is a legal determination, and is based on several factors, most of which revolve around control. Does the business tell the worker how to perform the service and how to work with its clients? Does the worker use the company equipment and abide by the company policies? If the answer to the above (and other questions) is yes, the business might have an employee and not an independent contractor. Why Does It Matter? Misclassification is a huge problem for businesses. Employment laws apply to employees, so if the business “think” it has an independent contractor (because the independent contractor agreement says so) but the law determines it’s actually an employee, then there are employment laws that must be followed, that the business may be violating. If you are an executive, owner or CEO of a company in Florida with employees or independent contractors, make sure you and your management team knows and understands the employment laws. Make sure your workers are properly classified, so you can pay them properly, have the proper documentation, reduce risks of lawsuits and operate the business in a legal manner. We offer HR and employment law consulting to Florida businesses so they can have the peace of mind to know they are operating both effectively and legally. Contact us for more information to make sure your company is not violating the employment laws (link in comments).

Why does FLSA classification matter? •        Ensures employees receive all legally required wages and protections •        Protects the company from lawsuits, audits, and financial penalties •        Supports fair treatment and pay equity in the workplace •        Enables accurate budgeting and workforce planning •        Maintains compliance with federal and state labor laws Impact on the Employer: •        Back Wages & Overtime: Employers may owe years of unpaid overtime to misclassified employees. •        Liquidated Damages: Employers can be liable for double the amount of back pay (liquidated damages) unless they can show they acted in good faith. •        Civil Monetary Penalties: The Department of Labor may impose penalties for willful or repeated violations. •        Audits & Investigations: Misclassification often triggers broader audits and increased scrutiny from regulatory bodies. •        Legal Liability: Exposure to class action lawsuits and settlement costs can be substantial. •        Reputational Damage: Public lawsuits or DOL press releases may harm the employer's brand and employee trust. Impact on the Employee: •        Lost Wages: Employees may miss out on rightful overtime pay and related benefits. •        Workplace Morale: Discovering misclassification may erode trust in HR and management. •        Financial Stress: Employees may incur additional expenses without compensation (e.g., working long hours without pay). Impact on the Manager: •        Accountability: Managers who oversee misclassified employees may be scrutinized during investigations. •        Training Gaps Exposed: Misclassification often points to a lack of training or awareness of FLSA standards. •        Employee Relations Issues: Managers may face damaged relationships with direct reports due to mistrust or perceived unfair treatment. •        Operational Disruption: Reclassifications may require changes to scheduling, workload distribution, and budget management. If you need help ensuring that your team understands the FLSA and how to use the tests to determine if jobs are exempt or nonexempt, let’s talk. #FLSA #overtime #exempt #nonexempt #compensation #hr #humanresources #compensationconsultant https://lnkd.in/d6b9qUa9

Let’s talk about something too many security companies are doing wrong — and it’s costing people big. If you’re a security officer getting paid on a 1099, but you wear their uniform, report to their supervisors, follow their schedule, and take orders from them… you’re not an independent contractor. You’re an employee. And legally, you should be classified — and protected — as one. But here’s what’s happening in too many small and mid-sized firms: To cut costs, avoid payroll taxes, skip unemployment insurance, and dodge workers comp coverage, some companies are misclassifying officers as independent contractors. That’s not just unethical — it’s illegal. Let’s be clear: to be a legitimate subcontractor in this industry, you must: • Hold your own security agency license • Carry general liability and workers comp insurance • Have your own EIN • Invoice the company you’re working for • Control your own officers, uniforms, and operations If you’re wearing their uniform, working their post, under their direction, with their clients — you’re not a contractor. You’re an employee. And here’s why this matters: When you’re misclassified, you lose legal protections — including: • Overtime pay • Unemployment benefits • Workers comp coverage • Employer-paid taxes • Proper wage protections If you get hurt? You’re on your own. If you get terminated? Good luck with unemployment. If the IRS audits them? You could be pulled into the mess. Security companies: Do it right or don’t do it at all. Officers: Know your rights. Don’t settle for shortcuts. At Arizona Preventive Crime Unit, we don’t play those games. We classify our people correctly, train them well, and treat this like the professional industry it’s supposed to be. Because cutting corners on paperwork eventually cuts into people’s lives. #SecurityIndustry #PrivateSecurity #security #EmployeeRights #SecurityProfessionals #IndependentContractorMisclassification #SecurityLeadership #W2vs1099 #SecurityCompliance #ArizonaSecurity #DoItRight #SecurityCompanyStandards