We diligently represent employees who are misclassified as exempt or not covered as independent contractors.
It is common for employers to misclassify employees as independent contractors or as otherwise “exempt” employees in order to avoid paying overtime, minimum wages, employment taxes, workers compensation insurance, and healthcare and other benefits. Employee misclassification may not only violate the law; it may also impose serious financial hardship and other adverse consequences on the misclassified employee.
If you believe your company has misclassified you as an independent contractor, Martin & Bonnett may be able to help you claim the pay and benefits that you deserve.
If a business classifies a worker as an employee, it must pay taxes for Social Security, Medicare, unemployment insurance benefits and payroll taxes. The business must also comply with federal, state and local rules and regulations governing employment, including minimum wage and overtime, rules that prohibit unauthorized deductions and unfair contracts and leases, and rules that require provision of healthcare and other benefits, such as FMLA and protection from discrimination.
However, if a worker is classified as an independent contractor, the business does not have to worry about complying with often costly and burdensome rules and regulations, including the requirements to pay minimum wages and/or overtime. Moreover, businesses do not have to provide independent contractors with health insurance, retirement plans, paid vacation and other costly fringe benefits. Thus, there is great incentive to classify workers as independent contractors.
To determine whether a worker is an employee or an independent contractor, courts look to the degree of control exercised by the employer, including three categories of “control and independence” rules:
- Behavioral. Does the company control, or have the right to control, what the person does and how the person does his or her job?
- Financial. Are the business aspects of the worker’s job controlled by the payor? How is the individual paid? Are expenses reimbursed? Who provides tools, supplies, vehicles, etc.?
- Type of Relationship. Will the relationship continue? Is the work performed a key aspect of the employer’s business?
The fact that a person has signed an agreement stating that he or she is an independent contractor or exempt employee is not controlling. The reality of the working relationship is more important than the name given to the relationship in an agreement. In addition, the fact that a person has incorporated a business or is licensed by a government agency has little bearing on determining whether they are an employee.
The “economic realities test” provided by the Labor Department’s Wage and Hour Division helps to differentiate between employees and independent contractors. The Department has stated that “the goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee) or is really in business for him or herself (and is therefore an independent contractor).”
According to the DOL, the following factors are generally considered when determining whether, under the FLSA, a worker is an employee as opposed to an independent contractor:
- The employer’s level of control over the worker.
This factor focuses on who sets compensation and hours, who determines how the work is performed, and whether the worker is free to work for others and hire helpers. This is a complex analysis that requires careful review, because the employer may have little control in certain situations involving both employees and independent contractors. In those instances, the DOL will look to who has meaningful, substantial control over various aspects of the working relationship. Thus, a worker can be found to be an employee even if the employer exercises less day-to-day control over the worker. Note that this factor does not hold any greater weight than the other factors.
- Whether the work is an integral part of the employer’s business.
If a worker’s work is integral to the employer’s business, he or she is more likely to be economically dependent on the employer and less likely to be in business for himself or herself. Work is probably integral to the employer’s business if it is a part of its production process or is a service that the employer is in business to provide.
- Whether the worker has a managerial role.
This factor focuses on whether the worker has a managerial role, for example, of hiring and supervision of workers, whether the workers managerial skill affects his or her opportunity to advance in the company.
- The relative investments in facilities and equipment by the worker and the employer.
To be classified as an independent contractor, the worker must make some investment compared to the employer’s investment (and bear some risk for a loss). That may include investment in tools and equipment, so long as a worker’s investment compares favorably enough to the employer’s that they appear to be sharing risk of loss.
- The worker’s independence and initiative.
Both employees and independent contractors may be skilled workers. The DOL focuses on whether the worker’s skills demonstrate that he or she exercises independent business judgment, and whether he or she has personally invested in training, education or development of skills. The fact that a worker is in open market competition with others would also suggest independent contractor status.
- Whether the employer/worker relationship is permanent.
A permanent relationship with the employer suggests that the worker is an employee. However, the lack of permanence does not necessarily mean independent contractor status, because the impermanent relationship may be due to industry-specific factors, or the fact that an employer uses staffing agencies.