[co-author: Ainsley Hill1]
I. What Happened
Employers may incur new fines for misclassifying employees as independent contractors under a new Colorado law. On May 22, 2025, Governor Polis signed HB25-1001, which creates new fines starting at $5,000 per violation for employee misclassification. HB25-1001 specifically targets misclassifications that affect the employer’s wage and hour obligations. Due to another provision of HB25-1001, owners with a 25 percent or more interest in an employer-entity may also be liable for the misclassification fines. These fines, which are additional to the existing penalties for employee misclassification under the Colorado Employment Security Act, become effective on August 6, 2025.
II. What is Employee Misclassification?
- A misclassification occurs when an employer incorrectly categorizes a worker as an independent contractor. Employee misclassification happens when an employer classifies a worker as an independent contractor but cannot demonstrate that the relationship fits the legal criteria for an independent contractor.
- Willful misclassifications are subject to higher fines. A misclassification is willful if the employer knows it is incorrect. The employer need not to be reckless or malicious in making the misclassification for it to be willful. Rather, an employer need only to be practically certain that his/her classification of an independent contractor is incorrect to be subject to higher penalties.
- The fines apply when the misclassification may affect the employer’s wage or hour obligations. Employers avoid many obligations owed to employees when they engage independent contractors, such as timely and regular payment of compensation, providing itemized pay statements, payroll tax deductions, and responding to administrative claims by employees before the Division of Labor Standards and Statistics (the Division). HB25-1001 seeks to prevent this loophole for employers by specifically targeting misclassifications that affect wage and hour obligations. So long as a misclassification could have changed an employer’s wage and hour duties, the fines may apply.
- For each willful misclassification: $5,000
- For each misclassification not remedied within sixty days after the Division’s finding: $10,000
- For a second or subsequent willful misclassification within five years: $25,000
- For a second or subsequent willful misclassification not remedied within sixty days after the Division’s finding: $50,000
IV. What Employers Can Do
Both existing and new fines for employee misclassification put more potential liability on employers who fail to classify workers correctly. This is occurring against a backdrop of changes in applicable law designed to make it harder to sustain the classification of a worker as independent contractors. Employers and owners who are concerned about properly classifying employees should consult legal counsel to minimize the risks associated with this process and help avoid exposure to new fines on August 6, 2025.
Footnotes
-
Snell & Wilmer 2025 Summer Associate Ainsley Hill provided material assistance in the production of this article. Ainsley Hill is not a licensed attorney.
