Misclassified Independent Contractors

A growing issue in employment law is whether a worker is properly classified as an employee or an independent contractor. Both federal and state laws strive to explicitly distinguish employees from independent contractors by establishing tests that seek to determine the proper status of the worker. The law recognizes three broad categories of workers: (1) hourly employee, (2) salaried employee, and (3) independent contractor. An employer’s obligations change depending on the classification, and many employers may misclassify workers to avoid their legal obligations. Misclassification may deprive individuals of the many benefits, both public and private, that employees enjoy. Misclassified employees are often denied access to employment benefits; such as family and medical leave, overtime, minimum wage and unemployment insurance; to which they are entitled. Similarly, misclassified employees are denied certain protections provided by employment laws prohibiting discrimination, retaliation, and wrongful termination. 

The biggest difference between an independent contractor and an employee is that, as an independent contractor, an individual is equipped with the skills and resources that allow him or her to be their own bosses. They are considered to be independent from the employer that hired them or self-employed. Independent contractors have the right to control the type of work that will be done and how it will be done. In contrast, a person is considered an employee if he or she is subject to another’s right to control the manner and means of performing the work.

While many independent contractors are classified properly, some workers may, either mistakenly or purposefully, be classified as “independent contractors” when they are, in fact, employees.  Although the number of employees currently misclassified is unknown, the data available suggests it is a widespread problem.  For example, a Department of Labor study found that up tp 30 percent of the firms audited in 9 states misclassified at least some employees.

Misclassification can have serious consequences for employees, and can result in violations of federal and state laws.  Employers that have misclassified their employees as independent contractors may violate the Fair Labor Standards Act (“FLSA”) for violations relating to recordkeeping (not keeping records for these employees), nonpayment of the federal minimum wage, and nonpayment of overtime.  Misclassification of employees as independent contractors may also affect the application of a host of other laws and regulations, including, but not necessarily limited to:

  • The application of the laws prohibiting discrimination and retaliation in the workplace (i.e. Title VII of the Civil Rights Act of 1964, as amended);
  • The employee’s rights regarding state benefit regimes, such as unemployment insurance benefits and workers’ compensation benefits;
  • The employee’s rights to pension, health, and other employee benefit plans;
  • The employee’s rights to job-protection and unpaid leave; and
  • The employee’s right to organize and bargain collective under the National Labor Relation Act.

There are many methods to determine how to classify a worker, and it is possible for a workers to be classified differently under different tests. Courts typically apply an “economic realities” test when a worker raises a claim under the Fair Labor Standards Act, the Family Medical Leave Act, or Title VII of the Civil Rights Act. The economic realities test looks at how economically dependent a worker is on the business and classifies workers who derive a large majority of their income from one business as employees. Factors a court considers 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.

In contrast, the IRS uses a twenty point test to determine how a worker is treated for class purposes. Additionally, states have their own tests to classify workers. Some states have adopted the economic realities test but most states use a “right to control” analysis. The right to control analysis varies from state-to-state and typically evaluates how much control the business exercises over the worker.

Many lawsuits involving employment classification are class actions or collective actions that seek to recover unpaid overtime wages or compensation for working through mandated rest periods. The employment misclassification attorneys at Baillon Thome Jozwiak & Wanta LLP have represented workers and recovered millions of dollars in class action lawsuits alleging that workers were misclassified as independent contractors instead of employees. The laws regarding employment classification are complex and require detailed factual analysis. Contact our office to speak to a seasoned attorney if you believe that your company may have misclassified your position.

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