WHAT IS THE DIFFERENCE BETWEEN EMPLOYEES AND INDEPENDENT CONTRACTORS?

Whether a worker is an employee or an independent contractor under the FLSA is determined by looking at the economic realities of the worker’s relationship with the employer. If the economic realities show that the worker is economically dependent on the employer for work, then the worker is an employee. If the economic realities show that the worker is in business for himself then the worker is an independent contractor. The economic realities of the entire working relationship are looked at to decide whether a worker is an employee or an independent contractor. Employment under the FLSA is not determined by technical concepts or common law standards of control; it is broader than the common law standard often applied to determine employment status under other Federal laws.

What Is the Economic Reality Test?

The economic reality test uses multiple factors to see if an employment relationship exists under the FLSA (29 CFR 795.110). The goal of the test is to decide if the worker is economically dependent on the employer for work or is instead in business for himself. All factors should be considered. No single factor determines a worker’s status, and no one factor or combination of factors are more important than the other factors. Instead, the totality of the circumstances of the working relationship should be considered.

The following factors, discussed more below, should guide the assessment of whether a worker is an employee under the FLSA or an independent contractor in business for himself:

1. Opportunity for profit or loss depending on managerial skill,
2. Investments by the worker and the employer,
3. Permanence of the work relationship,
4. Nature and degree of control,
5. Whether the work performed is integral to the employer’s business, and
6. Skill and initiative.

Additional factors may be considered as well if they are relevant to whether the worker is in business for himself or is economically dependent on the employer for work. There are certain facts, however, that are not relevant to whether an employment relationship exists. What the worker is called is not relevant—a worker may be an employee under the FLSA regardless of the title or label they are given. A worker who is paid off the books or receives a 1099 is not necessarily an independent contractor and agreeing verbally or in writing to be classified as an independent contractor—including by signing an independent contractor agreement—does not make a worker an independent contractor under the FLSA. Additionally, such facts as the place where work is performed, whether a worker is licensed by State/local government, and the time or mode of pay do not determine whether a worker is an employee or an independent contractor under the FLSA.

WHAT ARE THE POTENTIAL CONSEQUENCES OF MISCLASSIFICATION OF EMPLOYEES AS INDEPENDENT CONTRACTORS.

Potential consequences an employer may face for misclassifying employees independent contractors include:

• Paying payroll, unemployment, and Medicare taxes as well as Social Security for each misclassified employee
• Interest on unpaid taxes
• Fines for employees that don’t have an I-9 on record
• $50 for each W-2 not filed
• Criminal and civil penalties.
• Payment of back wages to reclassified workers

In some cases, an employer may believe a worker doesn’t qualify as an employee. If the employer’s belief is supported by a reasonable basis, then it may qualify for relief under Section 530 of the Revenue Act of 1978.

In addition, the misclassification of employees as independent contractors constitutes serious FLSA violations which may remedied by private collective actions in federal court.  Collective actions are very expensive to defend or settle.  In fact, a small collective action of 10 to 15 participants cost from hundreds of thousands of dollars to millions to resolve.  (Solutions)  In fact, almost any FLSA violation may result in a collective action. 

CAS CUSTOM SOLUTIONS: 

Solutions for Misclassified Independent Contractors: Implementation of CAS Proprietary Independent Contractor Platforms & Related Documents:

To reduce and contain exposure to Hidden Liability created by independent contractors, misclassified employees and/or other problems, we recommend that such problems be corrected immediately.  As for independent contractors, we typically recommend the implementation of our proprietary independent contractor agreements and related documents. 

• Our propriety independent contractor agreements and related documents feature:
  • Class Action Waivers;
  • Self-actuating terms that prevent or significantly reduce the potential for misclassification;
  • Self-actuating terms that prevent independent contractors and their employees from engaging in conduct that may create misclassification determinations;
  • Self-actuating terms that require mandatory oversight by independent contractor management to ensure compliance with all material terms including “misclassification provisions” designed to reduce and contain Hidden Liability;
  • Terms that provide employers (or their designees) the right to audit the independent contractor compliance with all material terms with remedy provisions for non-compliance; and
  • Admissible Affidavit(s) that can be used in defense of:
    • Administrative and legal misclassification actions;
    • Wage & Hour collective actions; and
    • Administrative and legal actions for any type of Wage & Hour violation.

ADDITIONAL SOLUTIONS

Prevention is always the best line of defense against W&H claims. Beyond purchasing insurance, employers can mitigate risk by:

• Assessing the Risk within the Company, Starting with the State and Local Government Self-Assessment Tool Available from the U. S. Department of Labor’s Wage and Hour Division.
• Apply the Economics Realities Test to all of the Company’s independent contractors to ensure proper classification.
• Reviewing Exempt/Non-Exempt Employee Classifications Regularly and Promptly Updating or Revising Job Descriptions to Ensure Employee Classifications and Job Descriptions are Accurate
• Enacting Policies that Prohibit Off-The-Clock Work
• Regularly Reviewing Managerial Practices to Ensure that Supervisors Discourage After-Hours Work
• Correctly Understanding State Wage and Hour Laws, and Keeping Pace with any Local or Federal Changes
• Consulting with Outside Legal Counsel to Safely Navigate Wage and Hour Issues

BOTTOM LINE

It’s critical that businesses remain vigilante and review employee classifications to avoid devastating mistakes. CAS remains a trusted ally in assisting businesses with remaining compliant with the complex myriad of wage and hour requirements and obligations.  Maintaining a strong relationship with a knowledgeable consultant like CAS with extensive expertise can make all the difference in preventing and/or effectively managing exposure to wage and hour liability.