Are Your Independent Contractors Actually Employees?

Independent contractors often provide several benefits to employers, such as removing an employer’s duty to pay overtime and health insurance for such workers. In turn, the independent contractor status provides individuals with greater flexibility and control in their work environments. However, simply because someone is termed an “independent contractor” does not mean that the individual is actually one in the eyes of the law.

Just this month, the U.S. Department of Labor’s Wage and Hour Division issued a press release concerning its recovery of more than $1,000,000 in back wages and liquidated damages on behalf of 196 misclassified employees. During its investigation into the matter, the Department of Labor discovered that an employer misclassified 77 employees as independent contractors. In doing so, the employer violated the Fair Labor Standards Act because it did not pay its “independent contractors” (who should have been classified as employees) overtime and failed to keep accurate payroll records.

More than ever, it is important to ensure that persons conducting work for an employer’s benefit are properly classified. The Department of Labor has launched, and continues to push, a Misclassification Initiative. As part of that initiative, the Department of Labor is working with the Internal Revenue Service to end misclassification of workers and subsequently decrease the tax gap that results from such misclassification. An example of the agencies’ joint commitment to the Misclassification Initiative can be seen by the Department of Labor’s recent judgment.

Several factors must be analyzed to determine whether an employee has been misclassified as an independent contractor. These factors include, but are not limited to, the alleged employer’s control over the alleged contractor, the alleged contractor’s dependency on the alleged employer for his or her livelihood, and the alleged contractor’s opportunity for profit or loss. Notably, each “contractor” position must be analyzed on a case-by-case basis to ensure proper classification and eliminate any potential liability.