The misclassification of employees as independent contractors frequently denies minimum wage, overtime pay, and other protections to workers. Independent contractors generally do not receive benefits such as health care coverage and paid time off. When an individual is an employee, the employer must pay half of the social security and Medicare taxes. Independent contractors are responsible for paying their own Social Security, Medicare, and income taxes. The entities for whom the independent contractors work do not contribute to the cost of taxes that fund Social Security and Medicare.
On January 10, 2024, the U.S. Department of Labor published a final rule, effective March 11, 2024, which revises the Department’s guidance on how to analyze whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The final rule will require workers to be considered employees rather than independent contractors when they are “economically dependent” on a company. The final rule rescinds and replaces the 2021 Independent Contractor Rule. This final rule is intended to reduce the risk that employees are misclassified as independent contractors. Courts utilize a six-factor “totality-of-the-circumstances” framework for analyzing the relationship between a worker and a potential employer:
- Worker’s opportunity for profit or loss. This factor examines whether the worker has the ability to make decisions that affect their own profit or loss. Independent contractors typically have the opportunity to earn profits or incur losses based on their managerial skill, while employees may not.
- Investments made by the worker and the employer. This factor looks at the relative investments in facilities, equipment, or materials by the worker and the employer. A significant investment by the worker might suggest an independent contractor relationship.
- Degree of permanence of the work relationship. This factor uses the length of the relationship between the parties. A more permanent or indefinite relationship between the worker and the employer suggests an employee relationship, whereas an independent contractor typically has a relationship that is temporary or for a specific project.
- Nature and degree of control over performance of the work. This factor considers how much control the employer has over when, where, and how the worker completes the work. Independent contractors generally have more control over their work processes than employees.
- Extent to which the work performed is an integral part of the employer’s business. This factor looks to see whether the work performed is a central aspect of the business. If it is, then it is more likely that the worker is considered an employee. Independent contractors usually perform tasks that are peripheral to the main business.
- Use of the worker’s skill and initiative. This factor assesses whether the worker is engaged in an independent business or profession. If the worker uses their own specialized skills and initiative to market their services to the public, this may indicate an independent contractor status.
These factors are viewed in a "totality-of-the-circumstances" approach, meaning that no single factor is determinative; rather, all factors are considered collectively to determine the nature of the employment relationship.
Independent contractors have less protection than employees. When workers who should be classified as employees are misclassified as independent contractors, they lose the protection of the FLSA. That is, they are not guaranteed the applicable minimum wage nor are they entitled to time-and-a-half for overtime hours. Unless they obtain their own policy, independent contractors are not covered under workers’ compensation insurance, which is necessary in the event that they are injured on the job. Independent contractors are not eligible for the protections in the National Labor Relations Act, which ensures workers’ rights to form unions and collectively bargain to improve their working conditions. Independent contractors are not protected by anti-discrimination laws like Title VII, the Americans with Disabilities Act, and the New Jersey Law Against Discrimination.
If you believe that you have been misclassified as an independent contractor and have been denied overtime compensation, contact Morgan Rooks PC for a free consultation.