Bringing on independent contractors to round out your team and paying them on a 1099 may seem fast, easy and cost-effective. But while that flexibility has appeal, it can also be a fast track to serious risks for employers who misclassify their workforce. Misclassification isn’t just a “paperwork error” – it can lead to liability, fines and even significant legal battles. Furthermore, your company may risk liability for mistakes, errors, omissions or even crimes committed by uninsured or underinsured independent contractors.
Here are some things to consider when hiring an independent contractor:
Lack of Commercial Liability and/or Cyber Insurance Puts Your Business at Risk
When you hire an independent contractor, that individual’s level of liability coverage might not meet the standards required for your business. Many independent contractors may be uninsured or underinsured, and unfortunately, this could leave your company exposed in the event of a lawsuit or claim.
Consider a cybersecurity breach, for instance. In recent years, litigation around cybersecurity has skyrocketed, especially concerning third-party contractors. Cases like those outlined by DLA Piper highlight how firms can find themselves liable for breaches caused by external consultants who lack adequate coverage. If the contractor’s actions (or inactions) lead to a data breach or compliance failure, your company could be the one facing the financial and reputational fallout.
Unemployment and Workers’ Comp Insurance: Who’s Really Covered?
If you misclassify a worker as an independent contractor, that person may not be covered by unemployment or workers’ compensation insurance, which are typically employer responsibilities under W-2 classifications. This lack of coverage can quickly escalate into legal trouble. Should a contractor sustain an injury on the job or require unemployment benefits, your company might end up liable for unpaid premiums and penalties, in addition to back pay for misclassified employees.
The Department of Labor has issued clear warnings about the dangers of misclassification, emphasizing that even minor employment decisions could push an independent contractor’s status into employee territory.
Avoiding Tax Fines and Penalties
The IRS is not lenient when it comes to employee classification. If the IRS determines that you have misclassified an employee as a 1099 contractor, you could be liable for back payroll taxes, interest and penalties, which can add up quickly. Misclassification is a frequent trigger for IRS audits, and many businesses discover the financial impact far too late.
The IRS has issued clear guidelines to help distinguish employees from independent contractors based on factors like behavioral control, financial control and the nature of the relationship. However, these guidelines can be confusing, and even honest mistakes can have steep consequences.
With so much complexity around classification, businesses need to be careful. Misclassifying workers can open the door to a cascade of issues, from legal penalties to expensive lawsuits and severe reputational damage. Legal Tech Talent Network can provide properly insured consultants for your interim needs while handling all the HR, payroll and back-office administration.
Don’t let a 1099 decision turn into a business nightmare. Let LTTN handle your contract staffing requirements and reduce your exposure to costly risks.
