Misclassification
Worker misclassification is incorrectly engaging someone as an independent contractor when the working relationship legally constitutes employment. It exposes companies to back-taxes, penalties, and benefit liabilities, and is a primary reason firms use compliant EOR employment for long-term offshore staff.
Worker misclassification means engaging someone as an independent contractor when their working relationship legally qualifies them as an employee. It is the most common and most expensive compliance mistake US companies make when hiring internationally, since employee-vs-contractor tests differ by country and by agency (IRS, DOL, and equivalent foreign authorities all apply their own criteria).
Penalties compound quickly: in the US, unintentional misclassification carries 1.5-3% of wages paid plus 20-40% of the FICA share under IRC Section 3509, while willful misclassification exposes the employer to full back taxes plus a 100% FICA penalty. The US Department of Labor's Wage and Hour Division recovered $259 million in back wages for nearly 177,000 workers in FY2025 alone (DOL, January 2026).