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The Cost Of Misclassification Of Employees As Independent Contractors In Nevada

In the evolving landscape of employment, the classification of workers as either employees or independent contractors has become a pivotal issue in Nevada. Misclassification can lead to severe financial and legal repercussions for businesses. This blog explores the intricacies of worker classification, the potential costs associated with misclassification, and the broader impact on both businesses and workers in Nevada.

Understanding Worker Classification

Employees are individuals who work under the control and direction of an employer. They are entitled to various benefits, protections, and rights under state and federal laws, such as minimum wage, overtime pay, unemployment insurance, workers’ compensation, and family and medical leave.  Employees’ compensation is found in salary or an hourly wage.  There is withholding for taxes (both for the employer and the employee), social security and other similar obligations.  An employee receives a W2 documenting the wages and withholdings from the employer.

Independent Contractors operate as self-employed individuals or business entities providing services to a company under a contractual agreement. They have greater control over how they perform their work and are typically responsible for their own business expenses, taxes, and benefits.  As such, there is no withholding, taxes or social security associated with their compensation.  An independent contractor receives a 1099 documenting the compensation received.

The Cost of Misclassification

Financial Penalties

Nevada imposes stringent penalties on businesses that misclassify employees as independent contractors. These penalties can include:

  • Back Taxes and Fines: Employers may be required to pay back taxes, including unemployment insurance, social security, and Medicare contributions. Failure to pay these taxes can lead to significant fines.
  • Wage Violations: Employers may be liable for unpaid minimum wages and overtime. Under Nevada law, workers classified as employees must receive at least the state minimum wage and applicable overtime pay.
  • Insurance Penalties: Employers must provide workers’ compensation insurance for employees. Misclassified workers who suffer injuries can claim compensation, leading to additional costs and penalties for the employer.

Penalties for misclassification can be significant. Minimum wage and overtime violations, which can occur when an employee is classified as exempt/salary when they should be non-exempt hourly, are costly.  The Department of Labor generally looks back for two years when assessing violations and can go back three years if they determine the violation is willful. Back pay can be required for all affected employees, in addition to fines and penalties. Willfully misclassifying a worker as an independent contractor when they should have been classified as an employee can result in a penalty of $5,000 per misclassified employee under Nevada law.

Legal Repercussions

Misclassification can also result in legal actions from both the state and affected workers. Businesses may face lawsuits for unpaid wages and benefits, leading to costly legal fees and potential settlements. Additionally, state agencies like the Nevada Department of Business and Industry actively investigate misclassification claims, which can result in audits and further legal scrutiny.

Not just a Nevada issue

The cost of misclassifying employees as independent contractors is significant and multifaceted. The federal government just finalized its Final Rule on Independent Contractors which creates a different standard for measurement of whether a worker is an employee or independent contractor.  To avoid the several-layered determination of whether a worker is an independent contractor or employee, along with the costly pitfalls, Nevada businesses must diligently evaluate their worker classifications and ensure compliance with state and federal laws.

Please let Gordon Law help you in evaluating and documenting the classification of your talent.

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