Many large businesses can benefit from increased hiring resources, and the creation of roles for temporary workers, and freelancers. However, if these are not managed properly, they could be at risk of breaking employment regulations, and facing financial consequences. Misclassification regulations affect all industries, from construction and logistics to retail and healthcare.
HMRC can impose penalties in the UK for non-payment of withholding taxes. Depending on the severity, the penalty could be 100% of the amount due. It is not easy to navigate the UK employment rights and status in order to understand the risks of misclassifying staff or independent contractors. After this hurdle is overcome, maintaining and achieving compliance will be a major challenge.
How can employers avoid being fined for misclassifying employees?
Financial and Ethical Consequences
The incorrect classification of workers in a company directory can have a variety of financial consequences, including a negative impact on the cash flow. They include:
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Delay in payment of wages, overtime, and benefits
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Tax and National Insurance Payments
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The fines issued by regulators
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Legal costs following actions taken by employees who are underpaid
Loss of wages, a damaged staff morale and loss of talent are other consequences that go beyond financial ones. Misclassifying employees is not worth the risks, especially with many industries becoming more competitive due to technological innovations.
Confusion over IR35 still exists
In 2020, the IR35 regulations for UK freelancers were introduced to prevent tax evasion by businesses as a result misclassification. This legislation affects staff who are not on the payroll of the company and orders contractors to pay income tax and National Insurance at the same rate as employees.
Millions of pounds can be fined for breaking the regulations. A government agency was fined PS36million for misclassifying its staff and resulting in backdated taxes.
A recent report by the Public Accounts Committee, which is responsible for overseeing the government’s expenditures, has accused the rulings as being too complex. It stated that businesses find hiring freelancers to be too risky in terms of compliance. The report concluded that misclassification was not adequately deterred by the regulations.
The global risk of misclassification
Misclassification of workers is a global problem. Around the world, regulators are taking action against the exploitation of staff and the tax avoidance that is involved. As an example:
- In the United States , corporations such as FedEx and Microsoft were found liable over the past 25 years for misclassified employees, and had to pay settlements of millions of dollars (97 million for Microsoft in 2000, following an eight-year court battle; and $500,000,000 in the case for FedEx, in a lawsuit in 2015).
- In the European Union , the EU Court of Justice increased its scrutiny in 2017 by allowing misclassified employees to claim holiday pay that dates back to 1996.
- In Australia , the High Court of Australia ruled in 2022 that documented contract terms would be the main factor to determine misclassification. Previously, business relationships were assessed using a “multi-factorial test”.
How to avoid the traps
In order to ensure compliance with the worker classification legislation, and minimize risks for your business, you need to do:
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Audit your payroll documentation protocol and make necessary adjustments
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Examine the current guidelines and labour laws as well as keep an eye on any changes
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Develop clear policies when hiring independent contractors and workers
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Partner with a provider of workforce solutions and compliance
A workforce compliance provider’s role in helping
You can ensure that your leaders are kept up to date on the latest legal developments in relation to worker classifications, both in the UK as well as abroad.
The Employee of Record and Agent of Record services help determine how employees should be classified and engage in the system.
By taking this proactive step, you can stay informed and reduce the strain on your hiring and retention processes. This will allow you to concentrate on activities that are core to your business, which bolsters it rather than damages it.
