Understanding Independent Contractor Misclassification
The Bureau of Labor Statistics has estimated that more than 10.3 million workers in the United States, over 7% of the entire workforce, are classified by businesses as independent contractors. A Department of Labor study in 2000 concluded that up to 30% of businesses misclassified employees as independent contractors while the IRS found that 15% of employers misclassified approximately 3.4 million workers as independent contractors as of 1984. These statistics illustrate the size of the problem and the fact that millions of workers are potentially being deprived of benefits and proper wage payments, including overtime pay.
Federal and State Enforcement Priorities
The federal government and many state agencies have now made the misclassification of workers as independent contractors, instead of employees, a key enforcement priority. Private class action lawyers have also been targeting these types of claims, seeking to recover unpaid employee benefits and overtime for workers who have not been treated as employees, but should have been. Worker misclassification remains a significant focus for the Department of Labor and state enforcement agencies nationwide.
The Economic Reality Test Under FLSA Coverage Rules
In determining whether the overtime laws apply, FLSA coverage rules require that employers use an economic reality test in determining whether an employment relationship exists with respect to a given worker. The economic reality test uses a six-factor, totality-of-the-circumstances analysis to determine whether an employer-employee relationship exists under the FLSA, with the central inquiry being whether the worker is economically dependent on the employer for work. While no single factor is controlling or decisive in determining whether an employment relationship exists, the facts and circumstances that courts and federal enforcement officials examine in deciding whether an individual is an employee or an independent contractor are:
Key Factors in Worker Classification
• the degree to which the employer controls or directs the manner in which work is performed
• whether the worker’s opportunity for profit or loss depends on his or her managerial skills
• whether the worker’s duties are performed for the employer on an ongoing or permanent basis
• whether the service performed by the worker is an integral part of the employer’s business
• the extent of the worker’s investment in equipment or materials needed to perform the job, and
• the degree to which the worker is engaged primarily for the benefit of the employer
In most cases, a worker will be classified as an employee if the employer has the right to control not only what work will be done, but also how the worker will do it. This control test remains central to employee classification determinations under the Fair Labor Standards Act.
Legal Remedies for Misclassified Workers
Misclassified workers may be entitled to recover unpaid overtime wages, employee benefits, and other compensation they were wrongfully denied. An independent contractor misclassification lawyer can evaluate whether you have been properly classified and help you pursue claims for unpaid wages and benefits. Class action lawsuits have successfully challenged widespread misclassification practices across multiple industries, providing remedies for groups of similarly affected workers.
Legislative and Regulatory Developments
The President’s budget for the 2011 fiscal year includes provisions that target the misclassification of employees as independent contractors and are estimated to raise more than $7 billion in revenue over 10 years. In June, the Senate Committee on Health, Education, Labor and Pensions debated the merits of the Employee Misclassification Prevention Act, that would amend the Fair Labor Standards Act (FLSA) to require employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification. These legislative efforts reflect ongoing federal enforcement priority given to addressing employee misclassification.
Michael Lore
Founding Attorney
Michael Lore is the founder of The Lore Law Firm with over 25 years of experience in labor and employment law. He handles cases ranging from unpaid overtime and class actions to executive contracts and personal injury matters in courts nationwide.
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