Employee misclassification lawsuits & penalties

Employee misclassification is the act of improperly labeling the status of a worker for tax purposes. It is a common but significant issue for business owners.
This is especially true for business owners looking to expand their teams across borders, as international hiring pertains to a larger discussion concerning local jurisdictions and labor laws.

With this in mind, the following article explores employee misclassification lawsuits and penalties in 2025, including the various types of worker misclassification violations, standout lawsuits, and advice on how business owners can avoid them.

Types of Employee Misclassification

The following table provides a breakdown of the five most common types of employee misclassification.

Employee Misclassification Types and Penalties

Type	Description
Contractor vs. Employee	Treating someone who meets the economic reality or control tests as a 1099 contractor rather than a W-2 employee.
Joint-Employer Misclassification	Failing to recognize that two businesses (e.g. staffing agency + host company) both effectively control and employ the worker.
FLSA Overtime Exemption Status	Labeling a worker as salaried/exempt (no overtime) when their duties or pay level don’t meet the exemption criteria.
Government Contractor Errors	On public projects, misclassifying workers to evade Davis-Bacon or prevailing-wage requirements.
International/Remote Misclassification	Treating an overseas hire as a contractor without assessing local employment law and withholding obligations.

The most common types of misclassification are labeling a contractor as an employee (or vice versa) and overtime misclassification, both of which take up approximately 50% of FLSA filings. 

The remaining 50% is split amongst the remaining types on this list, as well as five additional types of misclassification, which contribute a negligible amount to total counts, both in quantity and severity.

Employee misclassification lawsuits & penalties: Examples

The vast majority of employee misclassification lawsuits play out on an individual basis.

These lawsuits follow a repeated process:

1. The employee files a demand letter or a wage-hour division investigation referral with the DOL
2. The complaint is then filed in federal court via the FLSA
3. The court determines whether the complaint can proceed as a collective/class action
4. Parties exchange depositions and related documents
5. The trial begins

This process does change a bit, however, when looking at international cases.

International Employee Classification 

Employee misclassification lawsuits and penalties vary significantly across the world. Depending on where you are hiring, business owners can expect varying levels of fines and liabilities, including jeopardizing the intellectual property (IP) rights for work completed and being banned from hiring in the country.

The following table categorizes several countries’ employee misclassification penalties.

Employee Misclassification Globally

Country	Is the Employer Liable For…
	Back Taxes?	Benefits?	IP rights?	Hiring Ban?
France	✅	✅	✅	✅
Germany	✅	✅	✅	❌
UK	✅	✅	Sometimes	✅
US	✅	✅	Sometimes	❌
Philippines	✅	✅	Sometimes	Sometimes
India	✅	✅	Sometimes	❌
Mexico	✅	✅	❌	❌
Netherlands	Sometimes	❌	Rarely	Sometimes
Ireland	✅	❌	Rarely	❌
Czech Republic	Rarely	Rarely	Rarely	❌
Hungary	✅	Sometimes	Rarely	❌

Business owners considering hiring within these or other countries should keep a close eye on the labor practices within. Consult the country’s local tax authority or department of labor site for primary sources, or consult comprehensive country guides from reputable employer of record (EOR) or Workforce Management platforms for an easier overview.

How to mitigate employee misclassification lawsuits & penalties

Understanding how employee misclassification lawsuits and penalties work is important, but business owners should prioritize a more proactive approach. To begin, business owners should:

• Follow DOL, IRS, and state labor board updates
• Join industry associations (e.g., National Association of Professional Employer Organizations) 
• Define project scopes 

Beyond these fundamentals, there are several high-level processes that can foster protections against employee misclassification. These include: 

Employee Misclassification Protections

Protection	Cost	Labor
Classification Processes	Low	Yes
Internal Audits	Low-Medium	Yes
Working with an Employer of Record (EOR)	Medium	No
Staffing Agencies	Medium	No
Internal Staffing	High	Yes

Several of these options can be combined for a more effective classification architecture. For example, refining your classification processes can take place before internal audits to meet expectations. Other options, such as working with an EOR, offer support to handle the process on your behalf, providing the most straightforward option.

Contractors vs Employees

One of the most important employee misclassification types is incorrectly labeling an employee as a contractor or vice versa. A more comprehensive guide to this distinction can be found by using the IRS 20-Point checklist, but a brief description breaks down like this:

International Contractor vs Employee: A Primer

	Contractor	Employee
Control	The contractor determines where and how the work is completed	The employer determines where and how the work is completed
Training	No training is provided	The employer provides necessary training to complete the work
Profit/Loss	A contractor cannot make a profit or incur a loss from the project	An employee cannot make a profit or incur a loss from the project
Payment	Payment is project-based, typically in milestones. Paid via invoice	Payment is hourly or salaried, paid via check or direct deposit
Tools & Materials	The contractor provides any tools and materials to perform the work	The employer provides any tools and materials to perform the work

Business owners who are still unsure how their workers might be classified can file Form SS-8 with the IRS to request direct assistance in deciding.

Navigating employee misclassification lawsuits

The reality is that employee misclassification lawsuits are more common than you might think, and easier to fall into than most business owners give them credit for. Even HR reps with decades of experience make these mistakes, and the complexities of international hiring require an even more seasoned hand. 

That’s why many business owners choose to outsource the responsibilities of employee classification to an experienced partner. 

Payoneer workforce management offers employer of record (EOR) and agent of record (AOR) tools for companies expanding their teams globally, not only removing the need to set up a local entity but streamlining processes for hiring and management along the way. 

If you want to discuss how we can help you mitigate employee misclassification risks, reach out to us here.

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