7 Ways Worker Misclassification Can Hurt Your Wallet (and Your Business)


There are ramifications well-above and beyond the simply economic ones facing an organization ensnared in a worker misclassification audit by the IRS, DOL or State Agency (click here to see what happens during such an audit). The damage is not always confined to the quarterly earnings or P&L statement. Indeed, there are other, more lasting and detrimental consequences to consider. Audits can be seriously disruptive to your operations and place your organization under a microscope both of government and public scrutiny. They can be very time consuming to correct and all this takes away from operational efficiency. Here are seven of the most vexing consequences of a worker misclassification audit, beyond the financial pain.

  1.  Perhaps the most long-lasting negative consequence of an audit is the “brand tarnish” experienced. Should the misclassification audit blossom into a class action lawsuit and be published in the media, the negative publicity can become a serious drag not just on recruitment, but also on the overall reputation of the organization. Just ask Uber. 
  2. Operations will need to be involved in defending against the audit and correcting the issues the audit uncovers. This means a good portion of the organization’s Legal, HR, Marketing, and Finance will be required to be involved, spending time defending and keeping damages to a minimum. During this time, core Legal, HR, Marketing and Finance activities essential to the business will not be engaged in their primary functions.
  3. Recruitment will suffer. As noted in the introduction, negative reputation can become a drag on sourcing and recruitment. Contractors may not want to come and work for your organization if they know it is involved in a lawsuit involving contractors. Since attracting top talent is so critical to business success, it is problematic when there is a disruption to the talent pipeline.
  4. In a similar vein to number three, loss of existing talent is another troubling consequence of being audited for worker classification. Contractors on site may decide to terminate their engagements or at least opt not to reengage at the end of their assignments/projects.
  5. Clients may begin to shy away from doing business with your company if negative media coverage suggests working with you and your contractors may be a potential risk to their business and reputation.
  6. Full time employees also tend to start looking more closely at the way they are being managed. If there is the perception they could be party to a lawsuit or may be misclassified (exempt vs non-exempt) – whether legitimate or not – the fallout could prompt the loss of good talent.
  7. Lastly, fines, back pay, past due benefits, and attorney fees associated with a class action suit can put a dent in the organization’s ability to continue operating at full steam. Coming back from a deficit can be a real drag on profitability.

Don’t wait until it is too late to determine if your organization is at risk. Calculate your organization’s risk profile with nextSource’s online Worker Misclassification Risk Calculator. Then contact nextSource for expert assistance in strengthening your risk mitigation policies and practices.

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