Two of the most common and costly wage and hour mistakes an employer can make are: (1) misclassifying employees as independent contractors; and (2) misclassifying “non-exempt” employees as “exempt.”
Making these mistakes can cause an employer to run afoul of the Fair Labor Standards Act (“FLSA”), and can expose an employer to costly wage and hour lawsuits (among other liability).
Misclassifying Employees as Independent Contractors
Independent contractors are not subject to the FLSA. They therefore are not entitled to overtime pay. Some employers incorrectly believe that having an independent contractor agreement with a worker makes the worker an independent contractor. It is not that simple. Rather, to determine whether a worker is a true independent contractor or an employee, a number of factors must be considered, such as:
- the extent to which the work performed is an integral part of the employer’s business (the more integral, the more likely the worker will be deemed an employee);
- the worker’s opportunity for profit or loss depending on his or her managerial skill (the more opportunity, the more likely the worker will be deemed an independent contractor);
- the extent of the relative investments of the employer and the worker (the more a worker invests, the more likely the worker will be deemed an independent contractor);
- whether the work performed requires special skills and initiative (the more specialized, the more likely the worker will be deemed an independent contractor);
- the permanency of the relationship (the more permanent, the more likely the worker will be deemed an employee); and
- the degree of control exercised or retained by the employer (the more control, the more likely the worker will be deemed an employee).
Employers found to have improperly classified workers are at risk for liability for matters such retroactive Social Security and Medicare payments, unemployment and workers’ compensation insurance, and exclusion from fringe benefits such as health and retirement plans. Additionally, as discussed below, employers could face wage and hour lawsuits for unpaid overtime due to the misclassified employees.
Misclassifying Non-Exempt Employees as Exempt
Under the FLSA employers must pay minimum wage and overtime pay at one and one-half the employee’s regular rate of pay for hours worked in excess of forty in a workweek, unless the employee fits within an exempt category of workers. A common mistake employers make is assuming that, if the employer pays an employee a salary, the employee is exempt from overtime pay. Paying an employee a salary, by itself, does not exempt the employee from overtime pay.
Rather, with few exceptions, an employee must meet a three part test in order to be exempt from overtime pay:
- Salary level test: The employee must be paid at least $23,600 per year ($455 per week). [A new rule proposed by the Department of Labor would raise the salary level to $35,308 per year, or $679 per week];
- Salary basis test: The employee must be paid a salary, and his/her base pay cannot be reduced based on the quality or quantity of work performed (with some exceptions); and
- Duties test: The employee must perform exempt job duties. There are three typical categories of exempt job duties, called “executive,” “professional,” and “administrative.” For example, for the executive exemption, employees must have a primary duty of managing the enterprise or a department or subdivision of the enterprise; must customarily and regularly direct the work of at least two employees; and must have the authority to hire or fire, or their suggestions and recommendations as to the hiring, firing or changing the status of other employees must be given particular weight. Actual job duties—not job titles—must be examined.
When employees who are improperly classified as exempt work over forty hours in any workweek, they are denied overtime pay to which they are entitled. The same is true for employees who are improperly classified as independent contractors.
Employees who have been deprived overtime pay can file a lawsuit against the employer in state or federal court. If a group of employees has been misclassified and denied overtime pay, what we see happening with increasing frequently is that employees will band together and file a “collective action” lawsuit against the employer. In a collective action lawsuit, notice of the lawsuit is sent to eligible employees, and the employees are given the opportunity to join the lawsuit. If an employer is found to have violated the FLSA by misclassifying employees (and therefore denying employees overtime pay), the employer is liable for the overtime due to the employees for the preceding three years, plus liquidated damages equal to the amount of unpaid overtime, and payment of the plaintiffs’ attorneys’ fees. These lawsuits can be extremely costly and time-consuming for a business.
The attorneys in Critchfield, Critchfield & Johnston, Ltd.’s employment law group routinely perform audits of businesses’ workers to ensure that all workers are properly classified. Please contact us for more information.