Risks of misclassifying employees as independent contractors
At the end of June, in what might be the largest misclassification case in its history, the U.S. Department of Labor (DOL) asked a federal court to force a Florida-based customer service provider to pay back wages and liquidated damages to more than 22,000 workers. Investigators found the employer misclassified employees as independent contractors and denied them their legally required minimum wage and overtime pay.
How the FLSA defines “employee”
Employers subject to the Fair Labor Standards Act (FLSA) must pay employees minimum wage and overtime pay when there is an employment relationship. An “employee” is “any individual employed by an employer,” per the FLSA definition.
A worker who performs services for a person (i.e., individual, entity, or employer) as an independent contractor, however, is not that person’s employee. Employers, therefore, don’t need pay them the federal minimum wage or overtime.
The DOL developed a multifactor test to analyze whether a worker is an employee or an independent contractor under the FLSA. The main question is whether, as a matter of economic reality, the worker is:
- Dependent on a particular individual, business, or organization for work (and is thus an employee) or
- Is in business for him- or herself (and is thus an independent contractor).
Employers can help further identify an independent contractor by looking at:
- The nature and degree of the worker’s control over the work, and
- The worker’s opportunity for profit or loss.
The more control and profit opportunity the worker has, the more likely the worker is an independent contractor.
More about the Florida case
In the case against the customer service provider, the DOL found the employer often recruited workers with promises they would “be their own bosses” and that they could generate income by providing customer support services to Fortune 500 clients.
The investigators determined, however, that the workers:
- Had no real autonomy,
- Were subject to the company’s stringent work scheduling policy, and
- Had to buy their equipment before providing clients with service and generating income.
The employer, however:
- Expected workers to pay for their mandatory training while attending courses offered through the company’s proprietary software.
- Failed to pay workers for attendance at what often amounted to multiple weeks of required training.
- Required workers to create their own corporations or limited liability companies, or join existing business entities, to support the company’s attempts to claim these workers were independent contractors.
- Required workers to sign an arbitration agreement waiving their ability to seek restitution for alleged FLSA violations in court.
Should the employer lose this case, it would face paying more than 22,000 workers’ lost wages — a costly mistake
Key to remember: Misclassifying employees as independent contractors can be risky and expensive. The employer in the case might have a good defense, but it must present it, which will take resources.
