What’s the big difference between an independent contractor and an employee anyway?

Tug of War by Creative Mania from the Noun Project

Sam spent 60 hours working on a project for your company last week, for which the business paid Sam $1,000. The company treated Sam as an independent contractor.

But, what if Sam was actually an employee instead?

The problem with misclassifying Sam.

As far as the U.S. Department of Labor is concerned, “misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces.”

Let’s focus on the overtime compensation component. The Fair Labor Standards Act (FLSA), the federal wage and hour law, includes an overtime pay mandate. The FLSA requires companies to pay non-exempt employees overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half of their regular pay rates.

If the company has misclassified Sam as an independent contract (rather than a non-exempt employee), it will owe Sam 20 hours of overtime at time-and-a-half. Plus, if Sam sues, Sam may be able to recover liquidated damages and attorneys’ fees. As will the other “Sams” whom the company has misclassified.

So, how can you tell an independent contractor from an employee under the FLSA?

(Your mileage may vary under different state laws. For more on that, check out this article from Judy Greenwald at Business Insurance in which Jonathan Segal and I weigh in. We’re just focusing on FLSA here today).

It just so happens that the DOL issued a final rule yesterday on this issue, which amends the regulations interpreting the FLSA to finally include some independent contractor language. The final rule is 261 pages, most of it preamble. But, the DOL summarized it in a press release.

TL;DR:

Focus primarily on: (1) how much control Sam has over Sam’s work; and (2) Sam’s opportunity for profit or loss. More control for Sam and more opportunity for P&L correlates with an independent contractor relationship.
Then, there are at least three other secondary factors:
- The amount of skill Sam needs to do the work (More skill correlates with independent contractor status)
- How long Sam will work for the company (less permanence correlates with independent contractor status)
- Whether Sam’s work is part of an integrated unit of production (less integration correlates with independent contractor status

If you skip to page 258 of the final rule, you’ll find some examples of how this plays out in the real world, including one involving a gig economy scenario. Study up now because the new rule takes effect on March 8, 2021.

Better yet, now is as good a time as any to conduct a wage and hour audit to confirm the correct classification of independent contractors and employees. I just so happen to know someone who can help with that.

For even more on the final rule, check out these resources: