Overtime Pay Laws for Independent Contractors
Independent Contractor vs. EmployeeThere are significant differences in being classified as an “independent contractor” rather than an “employee.” One important difference is that The Fair Labor Standards Act the federal law that requires minimum wage and overtime pay only applies to employees. Independent contractors are not covered. This means that independent contractors do not have to be paid time and a half for working overtime. As a result, employers have a significant economic incentive to misclassify employees as independent contractors, and often do in an attempt to avoid paying overtime wages. Additionally, employers must pay social security, Medicare, and unemployment taxes on wages of employees. Independent contractors are individually responsible for paying income tax and self-employment taxes.
Merely labeling a worker an independent contractor or having them sign an agreement does not necessarily make them an independent contractor and not entitled to overtime. Because it is not always clear whether a worker is an employee or an independent contractor, multiple factors are considered. There is no set number of factors that qualifies a worker and this determination must be made on a case-by-case basis.
Factors indicating that a worker is an employee:
- Employer has the right to direct and control the worker (even if he does not do so)
- Paid on an hourly, weekly, or monthly basis
- Uses equipment, tools, and materials provided by the employer
- Receives predetermined earnings and cannot realize significant profits or loss
- Schedule dictated by the employer
- Trained by the employer, either formally or informally
- Receives benefits, such as insurance, pension, or paid vacation or sick leave
- The relationship between employer and worker is ongoing – not on a job or project basis
Factors indicating that a worker is an independent contractor include:
- A contract stating the worker is an independent contractor, although this is not determinative
- Free to determine how the work gets done
- Paid for each individual job
- Uses his own equipment, tools, or materials
- Can personally realize significant profits or losses in the business
- Works temporarily or on individual jobs
Even if an employer improperly classifies an employee as an independent contractor, it can still potentially escape the tax obligations if there was a reasonable basis for doing so. Examples of a reasonable basis include:
- A longstanding, widely recognized practice of treating similar workers as independent contractors
- A court ruling treating workers in similar circumstances as independent contractors
- An IRS Revenue Ruling stating that similar workers are not employees
- A previous IRS payroll audit that did not determine that similar workers are employees
While an employer may be able to escape tax obligations, it will not be able to escape its overtime pay law obligations to the workers it misclassified. So long as the workers assert their claim within the applicable statute of limitations, they will be able to recover their unpaid overtime wages (potentially double), despite the reasons or beliefs that led the employer to improperly classify them as independent contractors.
A worker can get an official determination from the IRS on whether he is an employee or independent contractor by filing a form SS-8, although the process can take up to six months.