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 GAO recently determined that the number of misclassified workers has expanded by 50 percent.  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.

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.

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 focuses on the degree of control exercised by the employer as an essential factor in determining whether an employer-employee relationship exists. 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:

• 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.

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.