What is Employee Misclassification?

Employee misclassification occurs when a business incorrectly categorizes a worker as an independent contractor, exempt, or non-exempt employee. This mistake can result from misunderstanding labor laws, failing to track work duties properly, or deliberately avoiding certain payroll obligations.

Common Types of Employee Misclassification

  • Exempt vs. Non-Exempt Misclassification – Misclassifying an employee as exempt from overtime when they should be non-exempt, leading to wage disputes.
  • Independent Contractor vs. Employee Misclassification – Treating a worker as an independent contractor when they function as a full-time employee, which can violate tax and labor laws.

A study by the Economic Policy Institute found that 10% to 30% of employers misclassify employees as independent contractors, affecting payroll, benefits, and compliance.

Implications of Employee Misclassification

Employee misclassification can lead to financial penalties, operational inefficiencies, and reputational damage.

1. Legal & Financial Risks

  • The IRS and Department of Labor (DOL) impose penalties for misclassification, including back taxes, unpaid overtime, and fines.
  • FedEx paid $228 million to settle a lawsuit for misclassifying delivery drivers as contractors instead of employees.
  • Companies may face class-action lawsuits from employees demanding unpaid wages.

2. Payroll & Compliance Violations

  • Non-exempt employees misclassified as exempt may not receive overtime pay, violating Fair Labor Standards Act (FLSA) regulations.
  • Companies risk non-compliance with Affordable Care Act (ACA) benefits if they fail to provide eligible employees with health coverage.

3. Reputational Damage

  • Labor violations can attract negative press and discourage top talent from joining the company.
  • Uber and Lyft faced employee misclassification lawsuits, raising concerns about their employment practices. (Source – CNBC)

CloudApper’s UKG Pro Payroll Customization to Prevent Employee Misclassification

Many companies rely on manual classification, which increases the risk of payroll errors. CloudApper’s UKG Pro Payroll customization eliminates this risk through automation and compliance enforcement.

1. Automated Employee Classification

  • Uses predefined business rules to automatically classify employees as exempt, non-exempt, or independent contractors based on job roles, salary thresholds, and work hours.
  • Eliminates human errors and manual data entry mistakes.

2. Real-Time Compliance Monitoring

  • Tracks changes in FLSA regulations, IRS guidelines, and state-specific labor laws to ensure proper classification.
  • Generates alerts if an employee’s classification is incorrect before payroll processing.

3. Seamless UKG Pro Payroll Integration

  • Syncs employee classification data with payroll processing, tax reporting, and benefits eligibility.
  • Prevents unauthorized payments, ensuring only eligible employees receive overtime and benefits.

4. Intelligent Overtime & Pay Eligibility Tracking

  • Automatically detects overtime eligibility and adjusts pay calculations accordingly.
  • Ensures non-exempt employees receive fair compensation, avoiding legal claims.

5. Custom Compliance Reports & Audits

  • Generates real-time compliance reports to flag misclassified employees.
  • Automates audits and payroll reviews, reducing HR and payroll team workload.

6. Job Role & Status Updates Without Errors

  • Adjusts employee classification when roles change, promotions occur, or contract employees transition to full-time status.
  • Ensures records stay accurate and up to date across payroll and HR systems.

By using CloudApper’s UKG Pro Payroll customization, companies can prevent legal penalties, optimize payroll processing, and ensure full compliance.

Real-World Use Cases

1. Large Healthcare Providers Avoid FLSA Lawsuits

  • A hospital group with over 10,000 employees used CloudApper to detect non-exempt employees mistakenly classified as exempt.
  • Prevented $2 million in back-pay liabilities by automatically adjusting pay classifications.

2. Retail Chain Prevents Overtime Miscalculations

  • A national retail chain automated shift pay calculations, ensuring all hourly workers received overtime when eligible.
  • Reduced payroll disputes by 40%, increasing employee satisfaction.

Conclusion

Employee misclassification is a serious issue that can lead to legal, financial, and reputational consequences. With increasing regulatory scrutiny, companies cannot afford manual errors in payroll classification.

CloudApper’s UKG Pro Payroll customization eliminates misclassification risks by automating compliance, ensuring accurate pay calculations, and integrating seamlessly with payroll systems.

Consult Our Experts

Ensure your workforce is classified correctly, payroll is compliant, and your business is protected. Contact CloudApper today to see how our UKG Pro customization can safeguard your organization from misclassification risks.