Employees in Disguise: What Independent Contractors Need to Know About Their Rights
Feds issue new guidance on misclassification of workers
You show up and do the same job every day. You’ve had the same boss for years. You get a paycheck from only one company.
And yet you receive no benefits. You get no overtime. When you prepare your taxes, you file as an independent contractor and write a check to cover the employment taxes out of your own pocket. If you get fired or laid off, you won’t collect unemployment because you were never an employee to begin with.
Welcome to the world of the unintentional independent contractor.
Many American workers have found themselves in the position of being labeled as contractors, even though they act as regular employees. Of course, this arrangement is often beneficial to the companies. They don’t have to pay payroll taxes, provide health insurance, or shell out for overtime and this can mean massive cost savings.
Meanwhile, people who never had any intention of going into business for themselves are forced into positions in which they’re legally “self-employed.”
However, there’s some good news. The Department of Labor (DOL) has recently started cracking down on companies that misclassify workers as contractors in violation of the Fair Labor Standards Act (FLSA). And even better—a recent victory for a New Jersey worker who may have been misclassified could indicate the start of a sea change in how the courts handle these issues.
Let’s look at the criteria the DOL uses to determine who is and who isn’t an independent contractor and then see how it was applied in the New Jersey case.
Who’s Really in Charge?
The DOL has outlined six questions to consider when examining a person’s status as a contractor or an employee:
How much control does the company have over the person’s work? Is the individual making independent decisions and/or controlling his or her work while providing service or does he or she report to a boss and follow instructions?
Does the individual have any opportunity for additional profit or loss based on his or her managerial skills?
Does the person have an investment in the operation in terms of providing his or her own equipment and/or employing subcontractors or helpers?
Does the service provided require any special skills?
What is the degree of permanence of the work agreement, i.e., is the work ongoing and consistent over a period of time or is it temporary and/or project-based?
Is the person providing a service that is an integral part of the company’s business?
While these questions do not comprise a “test” to determine a person’s status, the DOL uses them to create a context for how an individual’s work and working relationship fits into the larger scope of a company’s operations.
How the Courts May Interpret DOL Guidelines
In the New Jersey case we mentioned earlier, the U.S. State Court of Appeals for the Third Circuit overturned a lower court’s ruling that an individual was correctly classified as a contractor.
The appeals court ruled that the lower court didn’t properly apply the DOL guidance by focusing on the structure of the working relationship between the man and the company. The lower court’s decision hinged on the fact that the individual identified himself as an independent contractor and gained benefits that accompanied that status, such as certain tax advantages.
However, the appeals court stated that the lower court failed to take into consideration the economic realities of the man’s employment. For example, if the individual was entirely financially dependent on the company for his compensation and was not in a position to offer services to other companies, the man’s employment status may need to be re-evaluated.
The case was sent back to the lower court to re-examine the case based on the “economic realities” framework.
(The case discussed here is Safarian v. American DG Energy, Inc. v. Multiservice Power, Inc.)
What it Means to You
Misclassification of employment status strips people of their rights and the benefits that they may be legally entitled to.
If you believe that you’ve been improperly classified as an independent contractor, it’s a good idea to speak with an attorney who has experience with FLSA issues and other DOL regulations.
Email us at email@example.com or call (267) 273-1054 for a free consultation to find out more about your rights.