1099s Taxes and Overtime Pay – What Independent Contractors Need to Know about Misclassification
Q: I RECEIVED A 1099 FROM MY EMPLOYER BECAUSE THEY SAY I AM AN INDEPENDENT CONTRACTOR. THE TAXES I NOW OWE ARE A SHOCK, AND IT DOESN’T SEEM FAIR. WHAT SHOULD I DO IF I THINK MY EMPLOYER GOT IT WRONG AND SHOULD HAVE TREATED ME AS AN EMPLOYEE, PAYING ITS SHARE OF TAXES?
A: THE FIRST STEP IS TO FIND OUT IF YOU ARE LEGALLY AN INDEPENDENT CONTRACTOR OR ARE BEING MISCLASSIFIED AS ONE, WHEN YOU ARE REALLY AN EMPLOYEE. THIS IS THE KEY TO BOTH TAXES AND OVERTIME PAY ISSUES.
Every time tax season rolls around, workers who have received 1099’s or independent contractor tax forms (instead of a W-2 which is the tax form for employees) contact us wanting to know if they were properly classified as independent contractors versus employees – and if they were improperly classified, what they can do about their employer’s violation of the labor laws.
What Types of Workers are Commonly Misclassified as Independent Contractors?
Independent contractor misclassification is shockingly common in all types of industries, however, it frequently impacts workers in the following types of jobs/businesses:
- Oil / Gas / Energy
- Construction – Industrial and Residential
- IT / Help Desk
- Home Healthcare
- Disaster Recovery and Clean-up
- Various Jobs Through Staffing Companies
- Service Technicians and Installers
When they treat you as an independent contractor, the company shifts the costs to you. Not only do you lose out on the benefits of being an employee, but your taxes go up! – NELP
What are the Differences Between Independent Contractors and Employees?
The general distinction between an independent contractor and an employee is the degree of control and independence the worker has. An independent contractor is essentially running their own business and are self-employed, with a high degree of control over both the work they do and how they do it. Employees on the other hand, typically have bosses that instruct them as to what to do, how to do it and provide the tools/equipment necessary to get the job done.
In determining whether a worker is an employee or an independent contractor, all evidence of the degree of control and independence must be considered, including:
- The right to direct or control when and where the worker does the work.
- The right to direct or control who does the work.
- Who provides the tools and equipment needed to perform the work.
- Who provides the training on how to do the job, particularly as to procedures and methods.
- The type of work done. If a worker provides services that are a key aspect of the business, they are more likely an employee.
- Whether the worker has a “significant investment” in the tools or equipment used.
- Whether the worker has an opportunity for profit or loss. Having the possibility of incurring a loss indicates that the worker is an independent contractor.
- Whether the worker is guaranteed a regular wage (hourly, daily, weekly) versus a flat fee per job.
- The existence of a written contract. A contract stating that a worker is an independent contractor is not enough – all the factors must still be analyzed.
- Whether the relationship is expected to continue long-term versus for a specific project or period (typically less than 1 year).
- Whether taxes are withheld from the worker’s pay.
For more information about the legal differences between independent contractors and employees, check out this helpful post.
Overtime Pay Violations Resulting from Misclassification of Independent Contractors
Not surprisingly, the number one reason companies treat workers as independent contractors (even when they are legally employees) is MONEY. Classifying workers as independent contractors or 1099 employees substantially reduces payroll costs by avoiding paying employment taxes, benefits and Overtime Pay. Avoiding the payment of time and a-half for hours worked over 40 per week is commonly the largest and most desired benefit of misclassification, and it adds up to significant sums very quickly. Misclassified workers are commonly cheated out of their overtime pay by:
- Paying straight time for overtime, instead of time and a-half to hourly employees;
- Using a Day Rate pay scheme that does not pay a premium for overtime hours each week; and
- Working “off-the-clock.”
What Misclassified Employees Need to Do to Find Out if They Are Owed Back Overtime Pay
- First, know the independent contractor payment laws. Talk to an employment lawyer who represents employees with overtime claims, not to one who typically represents companies and management. Consultations with the Lore Law Firm are free and confidential.
- Talk to coworkers and other similar workers to find out if this impacts others. There is strength in numbers when trying to correct misclassification issues.
- Gather any available documents that show the agreement between workers and the company and how you were paid. This would include any written independent contractor agreement, any invoices or billing submitted, time records and pay stubs.
For more information, contact our lawyers who represent workers, not companies, in overtime pay claims. Call or submit your information using our convenient Case Evaluation form for a FREE and CONFIDENTIAL review of your circumstances.