Independent Contractor Misclassification

July 3, 2019

Did you know that not all employees are called “employees”? Many of the cases that we handle here at Gold Star Law which involve unpaid wages and unpaid overtime are a result of an individual being misclassified as an independent contractor instead of an employee.  Someone who is correctly classified as an independent contractor in not entitled to the same benefits and protections that an employee is entitled to under the Fair Labor Standards Act (“FLSA”) and other employment laws. Among other things, the FLSA dictates that employees, with some exceptions (known as exemptions), are generally entitled to be compensated at a rate which equals at least minimum wage for all hours worked up to 40 hours per week and at a rate of 1 and ½ times their regular rate of pay for all hours worked in excess of 40 hours per week. However, because independent contractors are not employees, the FLSA does not apply to them. In other words, if an employer properly classifies someone as an independent contractor then they are not legally required to pay that person minimum wage or overtime.

There are a lot of reasons an employer might incorrectly call someone an “independent contractor” when they are really an employee, and a lot of ways it can hurt that employee.  Often, the employer just doesn’t know the difference and thinks what they are doing is fine.  Other times, they do it to avoid paying the taxes employers are required to pay, which places all of the tax burden on the worker.  Sometimes they do it to avoid paying benefits or being responsible if someone is injured on the job.  Some do it to avoid liability for employment law-related claims, such as harassment and discrimination.  Often, they do it to avoid paying someone the overtime and minimum wage they are owed as a matter of law.  If you are truly an employee who has been misclassified as an independent contractor, you are entitled to all of the rights of an employee.

Unfortunately, many people who are classified as independent contractors are actually employees who were misclassified and therefore they are entitled to earn at least minimum wage and overtime. Generally speaking, an employee is someone who is dependent upon the business in which they perform work, while an independent contractor is a person who is engaged in a business of their own and generally performs services under a contract.

There are several factors which help the courts determine whether a person is an independent contractor or an employee within the coverage of the FLSA. The factors that help the court to determine an individual’s proper classification is known as the Economic Realities Test. These factors include:

  1. The extent to which the services rendered are an integral part of the principal’s business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor’s opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation.

Some questions that help determine the above factors include:

  1. Whether or not the individual is able to refuse work.
  2. Whether the individual supplies the tools and materials needed to perform the job or if those tools and materials are supplied by the business.
  3. Whether the individual is allowed to perform the same work for other businesses.
  4. Whether the individual can subcontract out the work they are paid to complete.
  5. Whether the individual can set their own schedule.
  6. Whether the individual receives a W-2 or 1099 tax form.
  7. Whether the individual performed their work under a contract.

No one factor is enough to make the determination whether an individual is an employee or an independent contractor; instead the employment relationship must be analyzed in its entirety. If you believe that you have been misclassified as an independent contractor and that you should be an employee, contact Gold Star Law today.