Of all the issues facing healthcare companies as of late, staffing is at the top of the list. From ensuring staff are being properly utilized and reducing turnover to reducing reliance on contingent staff and more, you'd be hard pressed to find a facility that hasn't experienced staffing woes of some type.
In fact, reliance on contingent labor has been a real issue both in terms of costliness and reliability. However, one of the seldom considered aspects of contract employees is employee misclassification. Classifying each employee as full-time W-2 or contract 1099 properly is of utmost importance to comply with tax regulations and labor laws.
Misclassification can lead to certain employees being treated unfairly and open you up to legal action. So let's explore what misclassification is, its consequences, and what you can do to prevent it during your hiring processes.
What is Employee Misclassification?
When hiring, it's crucial to ensure each employee is properly classified. Employee misclassification is when a full-time employee is classified as an independent contractor, or vice versa. Here are some of the main differences between them:
- Full-time (W2) employee: Entitled to benefits packages such as health insurance, worker's comp, 401k, IRA, etc. Full-time employees are also entitled to overtime pay and are covered by minimum wage laws.
- Independent contractor (1099): Under the law, are considered self-employed and are responsible for their own taxes and insurance policies. They are not entitled to the same benefits packages as full-timers.
Even in this brief comparison, you probably recognize some of the issues that can crop up if employees are misclassified. Nevertheless, let's review some of the consequences of misclassification and why it's so risky to the organization.
Consequences of Misclassification in Healthcare
Legal Repercussions
First and foremost, misclassification is a violation of federal and state labor laws. For instance, if a full-time employee is classified as an independent contractor, they could be entitled to back pay and have been missing out on critical benefits such as health insurance and retirement funds.
Additionally, since you're required to withhold funds in order to pay into social safety nets and income tax, the IRS will launch an investigation to hold you liable. If it's found that the misclassification was intentional/fraudulent, criminal charges could be filed by the government. Meanwhile, you open yourself to civil litigation from the affected employee(s).
Financial Impact
Depending on how long the employee(s) were misclassified, back taxes can really start to add up. Penalties, fines, and paying back the employees directly affect your bottom line, but are not the only financial impacts to the organization; more indirectly, funding, resources, and budgets are being misallocated thus holding back the organization from its full potential.
Here are a few more financial aspects that are affected by employee misclassification:
- Unpaid interest
- Overtime
- Unemployment insurance
- Worker's compensation
- Attorney fees
All of the above will be thoroughly investigated by government entities to ensure you pay back what is owed to each party, in addition to fines and potential criminal charges.
Operational Challenges
Financial restitution may seem like it's a short-term solution that can handwave your misclassification problems away. But it actually still affects you in the long term.
The impact on team morale and employer-employee relationships can be devastating, breaking an inherent trust that is often taken for granted. The misclassified employees are not the only ones who are affected by this, either; it's everyone. Once word gets around that employees were being misclassified to save some money, or indeed even if it is an unintentional mistake, your entire workforce will lose respect for you and wonder what they themselves have been missing out on.
If the misclassification was intentional, they'll see you as a fraud. If it's unintentional, they'll see you as incompetent. It's a lose-lose situation all around.
This heightens the risk of day-to-day operational disruptions, especially if staff decide to jump ship and go work for a competitor that they believe has more integrity.
Best Practices for Avoiding Misclassification
Hire an Employer of Record (EOR)
Employers of record are a type of business that employs staff on behalf of another organization. Unlike your typical recruiter, the EOR is responsible for all administrative duties associated with the employees, including managing compensation, benefits, payroll, etc.
An employer of record stays updated on labor laws and regulations, ensuring that payroll processes adhere to legal requirements, thus mitigating the risk of penalties and legal liabilities associated with non-compliance. Additionally, because the EOR acts as the legal employer for contract staff, they help organizations minimize co-employment risks and protect against potential disputes over worker classification.
Essentially, all forms of administrative liability fall on the EOR rather than the organization, ultimately eliminating the risks outlined above.
Write Clear Contractual Agreements & Manage Them Effectively
Contract management is one of the most important parts of mitigating the risks associated with employee misclassification. And the best way to achieve this is by utilizing a Managed Service Program, or MSP. HWL's MSP, for instance, manages all contingent staff contracts for you by engaging all stakeholders in a careful process that ensures competitive market rate structures and supplier commitment. We also assist in the onboarding process, ensuring that all certifications, documents, and health information are verified to ensure 100% compliance with HR requirements.
We understand the ins and outs of contingent labor contracts, so we know how to ensure responsibilities are clearly defined and how to stay aligned with federal and local labor laws.
Conduct Regular Classification Audits
Periodic reviews of each employee's classification status is another way to prevent avoidable administrative headaches. This is particularly true if you ever wind up hiring contract workers to a full-time position. With so many employees being shuffled around at any given time, oversights can happen. Proactive identification can spot these issues before any legal action is taken.
Additionally, labor laws, especially in high-stakes industries like healthcare, are constantly changing. Ignorance of the law is not an excuse to break it; and the last thing you need is for an amendment to open you to legal liability. This further underscores why an EOR and/or MSP can be so critical in maintaining compliance.
HWL Works to Ensure You Stay Above Board
Employee misclassification is quickly becoming a serious problem in the healthcare industry as more and more organizations rely on contingent labor for their daily operations. Ultimately, maintaining diligent oversight of employment classifications not only safeguards the company against potential liabilities but also bolsters its reputation and operational efficiency in the competitive marketplace.
This is what makes EORs so important to mitigating risks and protecting your bottom line. To find out more about how you can reduce your risk, get in touch with HWL today!