The True Cost of Misclassification: What Contracting Companies Need to Know

A new study from the Economic Policy Institute (EPI) highlights the financial impact of worker misclassification, estimating that independent contractors in certain industries may lose tens of thousands of dollars per year in wages and benefits compared to employees. While the debate around independent contractor vendor status versus employee classification continues, it’s critical for contracting companies to understand the risks—and how to avoid them.

Understanding the Financial Gap

The EPI’s analysis found that independent contractors in commonly misclassified roles, such as truck drivers, could be missing out on over $21,000 per year in lost wages and benefits. These figures account for employer-provided benefits like health insurance, retirement contributions, and paid leave—perks that many independent workers do not receive.

As small business owners, independent contractors work differently than employees. They are empowered with choices related to setting their own schedules and negotiating their own rates. Misclassification happens when a worker is designated as an independent contractor but is managed like an employee with little to no choice and without receiving benefits.

The Risks of Misclassification

Companies that misclassify workers, whether intentionally or unintentionally, may face serious legal and financial consequences, including:

• Back pay and benefit reimbursements – If a misclassified worker takes legal action, businesses could owe years of unpaid wages, overtime, and benefits.

• Tax penalties and fines – The IRS and state agencies aggressively pursue misclassification cases, leading to significant financial penalties.

• Lawsuits and reputational damage – Legal battles can result in class-action lawsuits, brand damage, and strained contractor relationships.

How to Stay Compliant While Supporting Independent Contractors

Avoiding misclassification requires a proactive approach. Businesses that rely on independent contractors can mitigate risk by:

• Implementing clear, compliant contracts – A well-structured contract that aligns with federal and state laws is essential.

• Providing the right technology – Contractor management platforms help businesses ensure that ICs operate independently while maintaining compliance.

• Offering optional benefits and perks – While businesses cannot provide traditional employee benefits, they can offer access to independent contractor-friendly perks, such as affordable insurance options and financial services, without compromising classification.

The Path Forward: Compliance and Support

Independent contracting is a vital part of today’s economy, offering businesses flexibility and workers the opportunity to control their careers as small business owners. However, staying compliant while maximizing the benefits of an IC workforce requires the right approach. By prioritizing proper classification and leveraging technology, contracting companies can mitigate risks while building stronger, more sustainable contractor relationships.

For contracting companies looking to streamline independent contractor management, Openforce provides solutions that ensure compliance, reduce misclassification risks, and support both companies and contractors. Schedule a consultation today to learn how we can help.