Misclassifying employees as contingent or “gig” workers is costing them thousands of dollars in lost pay and benefits, according to the Economic Policy Institute (EPI).
A 2022 EPI analysis estimates that misclassified contractors lose as much as $16,729 per year in income and job benefits compared with what they would have earned as an employee.
Misclassification of contractors and contingent workers usually means listing people as contractors when they actually qualify as regular employees. The definitions vary from country to country, but the general guidelines cover similar areas: employer control of what, how, and where work is done.
Since contract workers are self-employed, employers are exempt from employee taxes, social security payments, and even mandatory benefits like health insurance or pensions. Independent contractors and contingent workers are not entitled to the standard labor protections regular workers enjoy, including minimum wage and overtime pay.
Lost pay can come in many forms. Employers who hires contractors, could get away with paying less than minimum wage or by not paying the overtime they’d have to pay to an employee. Contingent workers do not accrue paid time off, so any days missed from work result in loss of pay. They also lose out on benefits along with employer contributions to social security, Medicare and pensions, unemployment insurance, and more.
Some argue that contingent workers are generally paid higher hourly rates than regular employees, but this is often not the case. Food delivery company Deliveroo, for example, has more than 100,000 riders in 12 countries, such as Australia, Belgium and France, making as little as £2 an hour.
Misclassification is a growing problem across many industries such as drivers, designers, engineers, cleaners, and care aides for example.
What makes this issue so critical is the vast number of people it impacts. There are 51.5 million contingent workers (35% of the entire workforce) in the US alone, so basic math suggests this problem totals as much as $861.5 billion in lost pay. The contingent workforce in EU countries is an average of 11% of 159 million people, adding another $320 billion. And the number keeps growing the deeper you delve in.
Governments are cracking down and employees are fighting back. It seems like every day there is news of another lawsuit involving employees classified unfairly as contractors, including a case against Twitter accusing the company of laying off its “contingent workforce” without proper notice. In another recent case, a court granted a claimant $65.11 in a case against Grubhub. The amount might seem small change, but as I said in a recent post, it will lead to bigger things.
The Causes of Misclassification of Contingent Workers
In most cases, misclassification is a product of money and responsibility. Some businesses are knowingly breaking the law and some are taking a risk-based approach hoping to never get caught. Classifying people incorrectly as contingent workers rather than employees simply makes things ‘easier’ for them, despite the violation of the law.
Then there are those businesses that lack knowledge. These can be genuine (but naïve) people and businesses who aren’t sufficiently informed about the details and aren’t asking the right questions. They might not be using tools that are available to help them or they aren’t working with the right people.
Government crackdowns are only going to be partially effective in combatting the problem. It can be difficult to catch all guilty parties, in the same way it can be difficult to catch National Minimum Wage offenders or Health and Safety offenders.
That’s why lawsuits may be a more effective avenue, especially when press coverage is high. The more this type of behaviour features in the media, the more things will have to change.
How to Keep Misclassification Out of Your Company
Any company that hires contingent workers needs to take special care to ensure that none of them should actually be classified as employees. Ensuring you are compliant starts with knowing what you’re working with. A current State Assessment will surface risks and find ways to avoid them. The assessment would form the basis of a roadmap for the future to ensure that proper guidelines are in place. Expectations and regular communications should be established with contingent workers as they would with any employee.
Contractor rates should be fair, that is, an amount that permits them to take out their own benefits/pensions without penalty and allows them to take days off without ‘loss of pay’. Contractors are not cheap alternatives to employees.
Contractors tend to have a certain skillset required by the employer. Treating them badly means they will seek alternative work. Losing a skilled worker mid-project can have real implications to businesses.
After all, the way companies treat the people they work with goes a long way in opening (or closing) doors to top talent at all levels. If problems reach critical levels, prospective employees will avoid them, potential clients won’t use them, and existing clients will want to exit contracts.
And in the end, businesses needs to understand how to manage their contractors, so they wont end up paying steep fines on top of all the back pay they owe to the misclassified employee. So there is little to gain in the long run.
Papaya Global Contractor Management Fights Misclassification Risk
Using Papaya Global’s contractor management service is an effective way to manage hundreds of contractor invoices and to ensure that there is no misclassification in your company.
Papaya’s contractor experts assess your entire pool of contractor talent to ensure that no one is misclassified. If there is risk of misclassification with any contractor, Papaya will recommend alternative hiring solutions, such as working with an employer of record.
To learn more about contractor management or any of Papaya’s payroll and payment solutions, contact us and schedule a demo today.