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Misclassified Independent Contractors May be Owed Back Overtime Pay and Health and Retirement Benefits
This is the first part in a new blog series by Attorney Allen Vaught about overtime back pay issues.
In an all too common story these days, many employers label workers as independent contractors when, under federal law, those workers are really employees. Many of those workers do not realize that, despite having an agreement stating that they are independent contractors, they may be owed thousands of dollars in back overtime wages, retirement benefits and health benefits and are de facto employees.
Having personally taken an independent contractor unpaid overtime case to trial on behalf of a group of mechanics, which resulted in a $248,000 verdict against the employer, I can say first-hand that this is a big problem, and that many workers are not aware of their rights. The severity of this problem is underscored by recent legislation in Texas, a state that is historically reluctant to pass any laws that favor workers over employers, to impose penalties (albeit weak penalties) on government contractors who engage in independent contractor misclassification. (See Tex. Lab. Code § 214.008.) That law took effect on January 1, 2014, and provides penalties against state government contractors in the amount of $200 per misclassified worker. However, those penalties are only paid to the state, not the worker. The Texas Legislature’s interest is probably geared more towards stopping unemployment insurance tax evasion than protecting workers, but at least it is a step in the right direction. Additionally, the federal government has taken steps to crack down on independent contractor misclassification. (See http://www.dol.gov/whd/workers/misclassification/). While the federal government is interested in protecting workers’ rights to pay and benefits, a big motivator is also the millions of dollars not paid for Social Security, Medicare and other payroll-related taxes when employers misclassify employees as independent contractors.
Back Overtime Pay
When determining if a worker classified as an independent contractor may actually be due back overtime wages as an employee, federal law is clear that it the job title given to, or even agreed to, by the worker is not controlling. Instead, in determining if the worker labeled as an independent contractor is really an employee for overtime pay purposes, what matters is the “economic reality” of the working relationship. If the worker depends on the employer for his/her livelihood, then the worker is likely an employee regardless of the independent contractor label.
While the legal analysis can vary depending on which part of the nation the work is performed, the test set forth by the U.S. Fifth Circuit Court of Appeals in Hopkins v. Cornerstone Am., 545 F.3d 338 (5th Cir. 2008) gives good guidance. That court noted the long-held legal rule that, under the federal Fair Labor Standards Act (“FLSA”), the definition of “employee” is particularly broad. The court set forth five factors to be considered in determining whether a worker is an employee or an independent contractor under the FLSA: (1) the degree of control exercised by the alleged employer; (2) the extent of the relative investments of the worker and the alleged employer; (3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship. The court noted that each of the foregoing elements does not have to be satisfied in order to find employment status, but rather only a few of them.
In a growing trend from the Fifth Circuit, the most important of the five factors appears to be the permanency of the relationship – the longer the work is performed, the more likely there exists an employer-employee status. Hopkins, 545 F.3d 345-46. Work that lasts only a few weeks, and meets some of the other employee status factors, may qualify for independent contractor status whereas the same work performed over many months, or many years, will likely qualify for employment status. However, every case is different depending on the facts.
Even if the worker really believes that he/she is an independent contractor, the “economic reality” may trump that belief as opinions and contractual labels are not controlling. Robicheaux v. Radcliff Material, Inc., 697 F.2d 662, 667 (5th Cir. 1983). In the Robicheaux case, the court found that welders working as so-called independent contractors were really employees even though those welders “signed contracts stating that they were independent contractors,… listed themselves as self-employed on their tax returns, and had their own business cards and letterheads.” Robicheaux, 697 F.2d at 667. So, even if you signed an agreement to be an independent contractor, did that work under a business you formed, and deducted expenses for that business on your tax return, the company you worked for may still owe you back overtime wages.
So, what happens if a worker is really an employee instead of an independent contractor under the FLSA? The answer is that the employee may be due significant back wages and additional damages for the previous three-year period of time. Unless the employer can prove that the employee meets one of the few exemptions from the FLSA’s overtime wage requirements, then the employee is retroactively due time and one-half his or her regular hourly rate of pay for all hours worked over 40 in each workweek. If the worker is paid a salary, then the salary is converted to an hourly rate to determine the overtime rate of pay. Also, if the employer does not keep an accurate record of every hour worked on a weekly basis, then the worker is permitted to make a reasonable estimate of the unpaid overtime hours worked. Finally, the employer generally has to pay the employee additional damages, known as liquidated damages, in an amount equal to the back wages owed. So, if the employee is owed $10,000 in back overtime wages, then, generally, the total amount to be paid would be $20,000. The employer also has to pay legal fees and costs to prevailing employees. The employee can also bring their claims as a class action if there are other similarly affected workers.