Misclassification of workers, either as independent contractors or as exempt employees under the Fair Labor Standards Act (FLSA), is a serious problem in our country. Misclassification is so serious that the United States Department of Labor’s Wage and Hour Division is working with states and the IRS to address the problem. Oftentimes workers are unaware that they have been misclassified. As a result, they are being denied wages, benefits and protections the law requires, such as minimum and overtime wages, family and medical leave and unemployment insurance. This post explains the problem of misclassification and what workers can do about it.
Independent Contractor Misclassification
Independent contractor misclassification means employers wrongly treat workers who meet the legal definition of employee as independent contractors. Employers often do this to avoid paying their workers proper wages and to avoid providing them benefits they would get as employees. The FLSA is the federal law that guarantees workers minimum wages and overtime pay for non-exempt employees. Under the FLSA, the general difference between employees and independent contractors is that employees are economically dependent on the business of the employer whereas independent contractors are in business for themselves. There are a number of factors to consider in determining whether someone is an employee or an independent contractor. This is often referred to as an “economic realities” test. The “economic realities” test typically looks at the following factors:
- The extent to which the work performed is an integral part of the employer’s business;
- Whether the worker’s managerial skills affect the worker’s opportunity for profit and loss;
- The relative investments in facilities and equipment by the worker and the employer;
- The worker’s skill and initiative;
- The permanency of the worker’s relationship with the employer;
- The nature and degree of control by the employer.
Factors, such as whether you receive a 1099 or you sign an independent contractor agreement are irrelevant to the “economic realities” analysis. What matters is the actual relationship between the employer and the worker in determining whether someone is an employee under the law.
Exempt Employee Misclassification
Exempt employee misclassification means employers wrongly treat employees as exempt from overtime under the law and do not pay them time-and-a-half for hours worked over 40 in a week. In this situation, the employees should be classified as non-exempt and paid overtime. Employees who are paid on a salary basis, work long hours and who are wrongly classified as exempt may be owed significant overtime wages.
In order to be properly classified as exempt under the FLSA, employees must be paid a fixed salary of at least $455 per week and qualify under the duties test for one of the exemptions. Although there are a number of exemptions under the FLSA, the most common exemptions that apply are the “white collar” exemptions for executive, administrative and professional employees, the outside sales exemption and the computer employee exemption. There is also a special exemption for highly compensated employees. Highly compensated employees earn $100,000 or more a year, primarily perform office or non-manual work and regularly perform at least one of the duties of “white collar” exempt executive, administrative or professional employees.
State exemption laws may differ from the FLSA. For example, in New York, there is no salary basis component for the professional exemption. Therefore, employees may be paid on an hourly basis and be properly classified as exempt professionals under New York law as long as they meet the duties test for a professional employee.
What are my rights if I have been misclassified?
Employees who believe they have been misclassified can band together to bring a class action lawsuit in order to seek wages, benefits and other damages to which they are entitled under the law. Examples of recent independent contractor misclassification lawsuits that have settled include a $227 million settlement for FedEx drivers across 19 states, a $27 million settlement for Lyft drivers in California, a $5 million settlement for Door Dash drivers and an $8.75 million settlement for Postmates drivers. Thomas & Solomon obtained a class action settlement in excess of $40 million on behalf of underwriters who worked at JP Morgan Chase and were misclassified as exempt administrative employees.
If you believe you have been misclassified and want to learn about your legal rights and options, contact us for a confidential consultation about your situation.