In recent years a growing number of employers have been misclassifying employees as independent contractors, otherwise known as freelancers, contractors, 1099 workers, temps, and project workers.
Some businesses misclassify employees as independent contractors as a way to reduce labor costs and avoid legal responsibilities.
The independent contractor relationship can provide advantages to both businesses and workers, and many contractors are classified properly. Some businesses, however, knowingly misclassify employees as independent contractors as a way to reduce labor costs and avoid legal responsibilities. This has led to problems such as a reduction in wage and hour protections for workers, lower tax revenues, and an uneven playing field for employers who properly classify workers.
Because no single test exists to determine whether a worker is an employee or an independent contractor, the issue is a complicated one that continually arises in government enforcement actions as well as class action lawsuits. Workers who feel they have been misclassified as independent contractors can file a lawsuit against their employer seeking compensation for unpaid wages and other job-related benefits.
If you feel that you’ve been wrongly classified as an independent contractor, ClassAction.com can help. Schedule a free case review to learn your legal options.
Independent Contractors vs. Employees
Being an independent contractor isn’t necessarily a bad thing. Many workers choose to perform contract work because it allows them the freedom and flexibility of having multiple clients, but no “boss”. From an employer’s perspective, independent contractors cost 20-30% less than employees, reduce exposure to lawsuits, and provide more leeway in hiring and firing workers—something that’s particularly important for businesses with fluctuating workloads. Contractors may also be more efficient than new hires since they often have a specific area of expertise.
As long as both the worker and the business benefit from a freelance arrangement, there generally isn’t grounds for a dispute. Problems arise when contractors are treated as employees, but don’t receive the additional benefits of actually being employees.
The chart below highlights some of the major legal differences between independent contractors and employees.
|· Earnings reported to IRS on Form W-2||· Earnings reported to IRS on Form 1099|
|· Businesses required to pay unemployment and workers compensation premiums||· Businesses not required to pay unemployment and workers compensation premiums|
|· Required to be paid the minimum wage||· Not required to be paid the minimum wage|
|· Required to be paid overtime pay for working more than 40 hours in a workweek||· Not required to be paid overtime pay for working more than 40 hours in a workweek|
|· Entitled to employer health insurance and pension plans, sick and vacation pay, medical leave, meal and rest breaks, and expense reimbursement||· Not entitled to health, pension, paid time off, meal and rest breaks, medical leave, or expense reimbursement|
|· Employer pays ½ of employee’s FICA taxes (Social Security and Medicare tax)||· Contractor pays 100% of FICA taxes|
|· Have the right to labor union representation under the National Labor Relations Act||· Not covered by National Labor Relations Act|
|· Protected by anti-discrimination and anti-harassment laws||· Anti-discrimination and anti-harassment laws don’t apply|
|· Have whistleblower protection against retaliation||· No whistleblower protections|
|· Eligible for disability and unemployment insurance benefits||· Not eligible for disability or UI benefits|
Consequences of Misclassifying Workers
Misclassifying employees as independent contractors produces significant costs for workers, law-abiding businesses, and the economy. Specific costs include:
- Lower earnings and fewer benefits: The U.S. Government Accountability Office (GAO) reports that independent contractors and other so-called “contingent workers” earn less per week and per year compared to employees. Non-employees are also less likely to receive work-provided benefits.
- Less economic security: Lower income and unreliable work for independent contractors result in economic insecurity. This, in turn, leads to higher utilization of public assistance.
- Loss of tax revenue: Employer misclassification results in billions of dollars in lost tax revenue to federal, state, and local governments each year, as well as lower Social Security, Medicare, and unemployment insurance contributions.
- Unfair competition: Companies that misclassify workers have a competitive advantage over companies that properly classify workers because misclassification lowers labor costs. This helps unlawful businesses to outbid lawful businesses, which depresses wage and labor standards as a whole.
Commonly Misclassified Workers
Independent contractors make up approximately 7-8% of the workforce. Studies estimate that 10 to 30 percent of employers misclassify their employees as independent contractors.
Misclassification is prevalent in application-based startups such as Uber, Lyft, Grubhub, Homejoy, and TaskRabbit that rely on contract labor. Many of these companies are currently the subject of lawsuits that seek to have 1099-workers reclassified as employees.
Other workers that are commonly misclassified as independent contractors include:
- Construction workers
- Cable/internet service installers
- Delivery drivers
- Home health workers
- Stage hands and other backstage workers
- Oil and gas workers
- Hotel/motel staff
- Security personnel
- Car service/limousine drivers
Determining Independent Contractor vs. Employee Status
The Department of Labor, Internal Revenue Service (IRS), and many state workforce agencies have deemed worker misclassification a serious problem and undertaken vigorous enforcement efforts to curb the practice. And as workers themselves become more aware of the issue, they are being more proactive about filing misclassification lawsuits and holding employers accountable.
No single rule or test is used to decide a worker’s employment status.
Unfortunately, even though rooting out worker misclassification is a national priority, the question of whether a worker is a contractor or an employee is a complicated one without a straightforward answer.
No single rule or test is used to decide a worker’s status. The Supreme Court has held that all facts relevant to the worker-employer relationship must be considered. But even the facts to be considered are not consistent, as different agencies use different standards. The DOL, for example, uses a six-factor “economic realities test,” while the IRS uses a 20-factor test, and the California Department of Industrial Relations uses an 11-factor test.
Employees and the Fair Labor Standards Act
DOL’s determination is an important one because in order for workers to be eligible for Fair Labor Standards Act (FLSA) minimum wage and overtime protections, an “employment relationship” must exist between the worker and the employer.
The Fair Labor Standards Act (FLSA) defines “employ” as including to “suffer or permit to work.” This broad definition is intended to provide the greatest possible number of workers FLSA minimum wage and overtime protections.
In addition to the “suffer to permit to work” definition, the Department of Labor uses an “economic realities” test comprised of six factors:
- The extent to which the work performed is an integral part of the employer’s business
- The worker's opportunity for profit or loss depending on his or her managerial skills
- The relative extent to which the employer and the worker invest in facilities and equipment
- Whether the work performed requires special skills and initiative.
- The permanency of the worker-employer relationship
- The degree and nature of control exercised by the employer
Again, no single factor is the key to determining worker status. The key is whether, in view of all factors, the worker is economically dependent on the employer or in business for himself or herself.
A recent DOL Administrator’s Interpretation is meant to further clarify the distinction between employee and independent contractor. The Interpretation says that “most workers are employees under the FLSA’s broad definitions” and stresses the wide scope of the FLSA’s employment definitions.
Independent Contractor Misclassification Lawsuits
Workers who feel they’re wrongly classified as independent contractors don’t have to sit idly by and wait for the government to intervene on their behalf.
Although regulatory agencies are cracking down on companies that abuse the independent contractor business model, workers can take matters into their own hands by filing a class action lawsuit against their employer. A class action lawsuit allows workers who are misclassified to seek compensation for unpaid wages, business expenses, and other employee benefits from their employer. It’s also possible to file an individual worker misclassification lawsuit.
Learn all your legal options and how a lawsuit can help during a free case review from ClassAction.com