[author: Anthony E. Cooch, Esquire]
Last week, the Department of Labor Wage Hour Division found that a Woodbridge, Virginia construction company misclassified employees as contractors and failed to pay overtime in violation of the Fair Labor Standards Act (“FLSA”). According to a press release issued by the Department of Labor (“DOL”), employees of A&M Drywall were paid on a piece-rate basis. The company classified certain workers as independent contractors and failed to pay an overtime premium for hours worked in excess of 40 per week. These errors resulted in the company agreeing to pay $101,007 in back wages to 120 employees.
In its press release, the DOL expressed concern that employee misclassification is an “alarming trend” particularly in industries employing low-wage, unskilled workers. In light of the DOL concerns, businesses in these industries would be advised to evaluate their practices in determining whether a worker is an independent contractor or employee.
Employee or Independent Contractor?
There is no single rule or test that indicates whether a worker is an employee or contractor. Both the Fair Labor Standards Act (“FLSA”) and Internal Revenue Code evaluate several factors in making the determination as to worker classification. These factors assist in determining whether the relationship between worker and business looks more like that of an employer/employee relationship or more like that of an independent contractor relationship.
These factors are:
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The extent to which the services performed by the worker are integral to the business
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Whether the relationship is temporary or permanent
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How much the worker invests in facilities and equipment
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How much control the business has over the worker
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The worker’s opportunity for profit and loss
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The amount of initiative, judgment, or foresight in open market competition with others that is required in order for the worker to be successful as an independent contractor
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Whether the worker has an independent business organization and operation
Next Steps
Businesses can take several steps to protect themselves from challenges regarding employee/contractor classification.
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Be consistent. Establish criteria for evaluating the status of an employee. Ensure that decision makers are properly trained.
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Be conservative. If a worker has some characteristics of an employee and some characteristics of a contractor, they are most likely an employee. If you are still in doubt, seek advice of counsel.
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Be comprehensive. If choosing to classify a worker as a contractor, document all of the factors supporting the decision. Ensure that a full review into the worker’s relationship with the business is conducted.
Overall, the employee/contractor distinction is based on the level of control the business has over the worker; the greater the level of control the more the worker will look like an employee. Taking the time to evaluate those persons classified as contractors to ensure they meet the criteria is essential to avoiding assessments for violating federal employment law.
Anthony E. Cooch is a shareholder with Bean, Kinney & Korman, P.C. in Arlington, Virginia, practicing in the areas of business law, employment law, government contracts, bankruptcy and creditors’ rights and civil litigation. He can be reached at 703.525.4000 or acooch@beankinney.com.
