Misclassification of Employees as Independent Contractors

One pressing issue for the Department of Labor is addressing the increase in employee misclassification. When an employer misclassifies employees in order to make them exempt from wage and hour laws, they are violating the Fair Labor Standards Act (FLSA). As reported by the Department of Labor, an increasing number of employers are intentionally misclassifying workers as independent contractors in industries such as construction and technology. What is the DOL doing to address this problem?

DOL Guidance on the Term "Independent Contractor"

One way the DOL has attempted to address this particular misclassification concern, is to issue an interpretation of the term "independent contractor." Although this interpretation does not have the force of law, it still provides guidance for determining appropriate employee classifications under the FLSA. The economic realities test is a six factor test used to consider the totality of the circumstances.

What Is the Definition of an Independent Contractor?

The threshold issue for the DOL in determining independent contractor status, is whether the employee is "economically dependent" on the employer – which would make them an employee rather than an independent contractor. On the other hand, if an employee actually operates their own business, then they may be accurately classified as an independent contractor. Generally speaking, the DOL recommends the broadest definition of employee in order to offer protection for the greatest number of workers under the FLSA.

What Happens If a Misclassification Is Found?

If an employer is found to have misclassified employees as independent contractors, the economic impact can be significant. The employer can be held liable for employment withholding taxes, in addition to paying minimum wages. Furthermore, the new employees will have access to other statutory protections, including their federal anti-discrimination rights.

Other forms of compensation may include:

  • Unemployment insurance
  • Healthcare benefits
  • Overtime wages

Exempt or Nonexempt Employees

It is important to understand the distinction between exempt and nonexempt employees, even if you are considered an employee under the FLSA. This distinction will determine whether you are entitled to overtime pay, as well as other things. Whether you are exempt or not depends on these three factors: (1) how much you are paid, (2) how you are paid, and (3) what kind of work you do.

Factors That Usually Establish "Exempt" Status

With a few exceptions, in order for an employer to properly classify an employee as "exempt," to avoid paying that employee overtime, the following factors must be met:

  • The employee is paid at least $23,600 per year ($455 per week)
  • The employee is paid on a salary basis
  • The employee performs exempt job duties

The employee must meet all three of these tests in order to be properly classified as exempt under the FLSA.

Have you been misclassified? To rectify your working situation or seek other counsel concerning your rights as an employee in Alabama, contact the employment lawyers at Wrady & Michel, LLC.

We are available for contact online orby phone at (205) 265-1880.

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