An independent contractor is a person who contracts to do work for another person according to his/her own methods and processes, and who is not subject to another person’s control; they work independently. Because they are self employed, independent contractors are not subject to many national and state labor laws which govern employers and protect employees in the workforce, such as the Federal Fair Labor Standards Act.
- Employers commonly misclassify employees as independent contractors, when they are actually “employees” in an effort to evade the obligation to pay overtime wages.
- Studies show that certain industries, such as construction, real estate, home care, trucking, janitorial and hi-tech have misclassification rates that are disproportionately high (See our “Is This You?” FLSA overtime law webpage.)
- Employers do not have to pay employment benefits to independent contractors
- Certain national and state employment laws do not apply to independent contractors
- It is frequently more cost effective for an employer to hire an independent contractor rather than an employee.
- IRS has developed the “20 Factor Test” to distinguish an employee from an independent contractor.
- Many factors are taken into account when classifying independent contractors.
- If you are under the direct control of your employer and they have authority over how your work should be performed, then you ARE NOT an independent contractor.
- Misclassification has substantial legal consequences, including liability for unpaid overtime pay.
- Fed Ex has paid millions of dollars in settlement costs over misclassifying drivers as independent contractors and is currently being sued for New York labor laws violations.
It is common for an employer to misclassify an employee as an independent contractor in order to cut the costs of providing standard employment benefits such as health, life, dental, and disability insurance, funded retirement plans, and paid vacation time and maternity leave. Employers also get the advantage of not having to worry about complying with many labor and wage laws set forth to protect “employees”. For example, an independent contractor is not protected from unfair bargaining practices (National Labor Relations Act), or from discrimination (The Civil Rights Act of 1964).
There are no guidelines for minimum wage and overtime requirements (FLSA) for independent contractors, and they have no retirement fund security (Employee Retirement Income Security Act) as they would if they were classified as an employee. Congress and the states have enacted numerous other laws geared toward protecting employees, and none of them apply to independent contractors. By hiring independent contractors rather than employees, employers can significantly reduce their liability and increased their profit margins.
Many factors are involved in making the decision to classify a worker as an independent contractor. The most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker, the work to be done and the manner and means in which it is performed.
The legal ramifications for misclassifying a worker as an independent contractor are substantial. Fed Ex has spent millions defending against enforcement actions and class action lawsuits over employee misclassification in wage – hour claims and other companies are becoming more proactive to avoid the same consequences.
If you believe that you may have been misclassified as an independent contractor and are due unpaid overtime, please fill out our Case Evaluation form, and one of our overtime attorneys will help you to evaluate your case.