Understanding Independent Contractor Misclassification in India

With remote work being in fashion for the last few years, there has been a growth in the number of people who are devoting their time to multiple organizations at once on their own terms. This could also be called as freelancing. This growth has also led to new career paths. Consequently, there has been a high number of independent contractor misclassification by employers who fail to classify their workers correctly.

Basically, there are two types of workers such as independent contractors and the second part is the employee working in an organization. The line of differences between these two categories could be quite blurry and has also led to a lot of confusion leading to misclassification. Due to this illegal classification of independent workers as employees the government tends to lose out on millions of unpaid taxes from these organizations.

Hence to understand more about independent contractor misclassification, how to properly conduct employee classification, and the difference between contractor vs employee, here is a blog explaining the same.

Table of Contents

• Employee Classification in India
• Independent Contractors vs. Employees
• Government’s Role in Worker Classification
• Key Questions to Validate Worker Classification
• Risks of Independent Contractor Misclassification
• How Asanify Can Help Ensure Compliance
• Conclusion
• FAQs

Employee Classification in India

The law tends to classify Indian workers into majorly two categories such as employees and workmen, based on the Industrial Disputes Act which was established in 1947. The workmen could also be called skilled or unskilled operational laborers. Whereas the employees are the controllers or supervisors of the workforce in any particular organization.

However in some cases especially in India, the use of contract workers is prohibited since they are mandated by the regulations that are imposed by the Indian employment laws. Thus the employers need to get a special principal employer license that will allow to hire contract workers.

With revolutions in the IT section in Indian tier 1 cities such as Mumbai, Bangalore, and Chennai, outsourcing of an independent contractor has reached an all-time high. Even though this has shown to be quite a noteworthy innovation, especially in the employment field there are still many uncertainties when it comes to the efficiency of usage of these independent contractors.

With the complications in Indian employment laws, the laws that guide independent contractors should be researched at their best. They should also be made sure that they are adhered to. If the organization in any case fails to adhere to these Indian employment laws there could be severe penalties issued.

Independent Contractors vs. Employees

The variation between an independent contractor vs employee goes even beyond the difference in their title. It is however very difficult to identify the differences which is why it is important to identify and properly classify the workers. This is an essential part of the organization’s framework. Whereas employee classification is important for law enforcement agencies since taxation becomes a distinguishable feature.

When it comes to the case of employees employers need to remit and withhold taxes on behalf of their employees. On the other hand, independent contractors need to pay their taxes and also withhold Value Added Taxes (VAT). They also need to remit the same on behalf of their customers.

For the employees, benefits and job security become vital. Hence being classified as an employer or as an independent contractor would hugely affect the access to reliable pay, and protection of rights under the Indian employment laws and benefits.

As a result of this contrast between these two types of workers sometimes employers are found to be guilty of deliberately messing up with the independent contractor misclassification. The Indian employment law refers to this act as Sham contracting.

However from an economic angle, one could say that there are innumerable reasons that justify the usage of independent contractors. Still, in the long run, it will be discovered that there are major drawbacks when it comes to using independent contractors with the government’s classification confirmation as one of the foremost reasons.

Suggested Read: How to Become an Independent Contractor: Step-by-Step Guide

Government’s Role in Worker Classification

One of the fundamental aims of government is to protect its citizens. The government protects its citizens by ensuring that the organization does not strip its citizens of their independent contractor rights and the rights to certain employment benefits. Thus every worker is supposed to be classified initially as an employee in an organization in India unless it has been proven otherwise.

In India, the courts prescribe two tests that help to determine whether the workers who have been hired are either independent contractors or employees. These two tests could be provided as follows:

The Integration Test

When it comes to the integration test, this test tends to play quite an important role in determining whether the worker is enjoying absolute independence from the organization or whether the employee is completely integrated and cared for by the employer.

The Control Test

The control test aims to discover if the employment relationship existing between the employee and employer is a master-servant relationship. It also aims to determine if the employer tends to control the nature of work that is done and how the employee is carrying out the duties that are assigned.

Key Questions to Validate Worker Classification

To understand the actual classification of workers under the contract by an organization, the authorities have laid down multiple processes. There are also intricate questions that will help to assess the validity of an organization’s classification claims.

While there are tests that do help understand the validity of an employee’s classification, it could also be tested with the help of certain questions posed by Supreme Court such as follows:

• Who pays the worker?
• What is the duration of the service?
• Who has the authority to dismiss the worker?
• What is the nature of the job?
• Who provides the work equipment?

Hence these questions provide a factual determination on the proper classification of the worker. However, a default in one or two of the questions will show that the organization is in fact guilty of independent contractor misclassification which then leads to certain consequences and penalties.

Also Read: Contractor Onboarding: The Ultimate 10-Step Checklist

Risks of Independent Contractor Misclassification

Independent contractor misclassification poses a significant risk for employers, usually, acting as a double-edged sword with far-reaching consequences. Contractors believe that they have been misclassified and may seek privileges and benefits typically reserved for regular employees. These disputes then rise to labor courts where the employers could even face potential damages and litigation costs.

Legal and Financial Penalties

Government authorities could impose major penalties and fines on employers who tend to misclassify employees. For instance, the Department of Labor may assess monetary fines under the Fair Labor Standards Act (FLSA), which establishes the minimum wage and overtime standards for employees. Based on the degree of non-compliance in India, the fine could range anywhere between thousands to lakhs of rupees.

Reputational Damage

Independent contractor misclassification could lead to major damage to a company’s reputation, especially in the public eye. The resulting damages for misclassification of employees could also result in a loss of a huge amount of revenue as well as clients who may not want to support an organization that has a bad reputation.

Liability to Injury Claims

Worker’s compensation claims could also be made by misclassified employees who sustain an occupational injury. These claims may even subject businesses to possible legal responsibility for the injuries along with an increase in the premium packages for the employee.

Control Limitations

Misclassification could pose a serious problem especially when an organization is working with thousands of contractors at the same time. There could be a lot of challenges when it comes to managing the consistency and work quality with independent contractors as compared to employees. 

Suggested Read: Freelancer vs Independent Contractor: A Guide for Employers

How Asanify Can Help Ensure Compliance

Asanify is always actively monitoring the changes to worker classification compliance in India. We have also developed a solution for hiring independent talent that ensures compliances at the rules tend to change continuously. In fact, if you do want help with compliance, Asanify can help you in the following ways:

Classification Support

Proper classification of workers based on whether they are hired as independent contractors or employees could be easily done by Asanify. If misclassification occurs there are high chances of facing risks related to the same such as

1. penalties
2. backpay
3. civil action
4. damaged reputation.

Asanify hence helps tackle such risks by ensuring compliance.

Compliance Management

Since compliance still remains as one of the biggest issues especially since multiple Indian labor and tax laws need to be maintained, if even one step goes wrong, it could lead to hefty repercussions. Not to mention the laws keep on changing over the years hence keeping track of the same is not possible unless you have the help of an organization such as Asanify.

Streamlined Onboarding and Payroll

When you use payroll software such as Asanify, you tend to automate certain tasks which could otherwise require a lot of time. Not to mention you also get to classify the workers based on independent contractors vs employees which tends to provide a unique payroll process for both categories.

Conclusion

The independent contractor misclassification hence significantly impacts the individual worker, the organization, and the economy at large. At the same time, individuals are also seeking roles as independent contractors to ensure there is control over how they engage in work. No single factor determines misclassification making the complexities of worker status even more complex to manage. Because of the high potential cost of misclassification and the additional imprisonment charges that challenge worker classification, it has become ever more important to ensure you correctly classify your workforce.

FAQs

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.