7 Consequences of Misclassifying Employees as Independent Contractors

7 Consequences of Misclassifying Employees as Independent Contractors

When it comes to employee classification, your staffing agency could be in one of three boats: You could perfectly classify your employees and contractors, you could accidentally misclassify due to simple human error or ignorance, or you could purposely misclassify to cut costs and save on administrative hassles.

Proper worker classification isn’t easy. Worker statuses aren’t cut and dry and there’s no fool-proof way to come to the right answer every time. The laws are vague and complex. It can be easy to make a mistake. But whether you’re misclassifying employees by innocent error or you do so to save on the cost of CPP and EI premiums, taxes, and the administrative time and costs of payroll processing, compliance, and HR, the consequences are the same.

If you’re not in the first boat, here are the consequences you risk facing for misclassifying employees as independent contractors.

1. Wage Law Violation

Under the Employment Standards Act, you must pay your employees minimum wage and overtime and you might have also have to pay vacation time, holidays, and more. But these laws do not apply to independent contractors. If you are found liable of violating the wage laws, you could go through a lengthy and costly lawsuit, racking up lawyers’ fees and having to pay back wages and other penalties for misclassifying employees.

2. Tax, CPP, and EI Violations

The Canada Revenue Agency naturally does not like being cheated by employers. When it comes to paying employees, you have a responsibility to remit taxes and pay a percentage of Canada Pension Plan and Employment Insurance premiums, but you do not have to do so for contractors. If you are found to have failed to withhold provincial and federal taxes and CPP and EI premiums, you will be on the hook to repay the full amount to the government, along with interest fees and penalties. Reducing your tax liabilities is critical to staying in business.

3. WSIB Violation

Most businesses in Canada must insure their employees through WSIB in case of injury or accident at work. Only a few industries are exempt from this requirement. If you misclassify employees as independent contractors and fail to insure them when required, you will be held liability for unpaid premiums and may be on the hook for covering lost wages and other costs an employee who is hurt on the job has been deemed as misclassified.

4. Benefits Plan Violation

Though contractors aren’t entitled to inclusion in your benefits plan, your employees might be. Excluding employees from your benefits plan can account for tremendous liability and is a hot area of enforcement. Many companies have been the subject of lawsuits due to this violation.

5. Privacy Law Violation

Your employees have a right to have their personal information secure. Legislation stipulates exactly how employers must keep this sensitive data guarded and how it should be retained. If you do not keep your employees’ data safe because you misclassified, you could be breaching a privacy statute and be exposed to lawsuits for damages of the breach.

6. Bad Reputation

Misclassifying employees as independent contractors, whether accidentally or on purpose, can result in a bad reputation for your staffing agency. Clients and candidates alike might not want to work with you due to the bad press, the fact that you do not comply with the law, and the fact that you do not treat your workers fairly. This can mean a lot of lost business opportunities.

7. Jail Time

The Canadian government takes misclassification seriously. You could face criminal penalties and prison time if you willfully fail to follow these laws. Is saving on costs and administrative work really worth the chance of going to jail for misclassifying employees as independent contractors?