Department of Labor Issues Important Ruling on Misclassification of Employees as Independent Contractors

August 17, 2015  |  Employment Law, Overtime Violations

The Department of Labor issued an Administrative Interpretation on July 15 that garnered little to no news attention. However, if you have been misclassified as an independent contractor rather than an employee, this report is incredibly important and could eventually make it much easier for you to prove that misclassification.

Gaming the System

Employers across the country have abused the term “independent contractor” on a regular basis. As a result, many people who should actually be classified as employees are missing out on a lot of workplace protections, according to the Department of Labor’s Wage and Hour Division, which issued the Interpretation. These protections include overtime compensation, workers’ compensation, unemployment insurance and minimum wage protection.

In addition, the Department states, misclassification makes the playing field uneven between businesses that play by the rules and companies that merely want to cut costs and avoid having to comply with labor laws.

So Who is an Employee and Who Is Not?

The Department takes several technical factors into account when determining whether a person is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). One of the most important is what is known as the “economic realities” test. This determines whether a worker is financially dependent on the company that employs him or her, or is truly in business for him or herself. If that dependence can be proven, the person is considered an employer. If it cannot be proven, the person will be considered an independent contractor. A person is also economically dependent on the employer if his or her work is integral to a company’s ability to provide a service.

The Administrative Interpretation includes a scenario involving a carpenter as an example to spell this out. If a carpenter is working for a business that frames houses, that person is providing a service integral to the company – and therefore an employee.

However, let’s say that same company contracts with a software developer that provides a product that helps the company schedule projects, track bids and material orders, and perform other administrative tasks. The work performed by the developer is not considered integral to the company’s ability to provide framing services. As a result, the developer is considered an independent contractor.

What’s the Bottom Line?

Basically, the significance of the Administrative Interpretation is that most workers classified as independent contractors are, in fact, employees. While the Interpretation does not carry the weight of law, it does show how the Department interprets the laws that are currently on the books. Consistent with long standing federal law, the bulletin confirms that employee status cannot be waive. So, even if a worker signs  and independent contractor agreement, deducts business expenses on their taxes, and has their own corporate entity, they may still be employees and entitled to the overtime and minimum wage protections of the FLSA. Furthermore, they may be entitled to the health and insurance benefits enjoyed by other workers labeled as employers by the company.

What it means for you is that you may now have a much better chance at winning a lawsuit against a company that misclassified you as an independent contractor. As a result, you may be able to obtain overtime wages and other compensation. If you would like to learn more, get in touch with an employment law attorney with Baron & Budd. Contact us online or call 866-495-1255.

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