Wage Theft by Misclassifying Employees as Independent Contractors

Over the years, we have seen a large number of instances of employers misclassifying employees as independent contractors, which allows the employer to avoid paying overtime and avoid paying employer-side Social Security and Medicare taxes, unemployment taxes and workers’ compensation insurance premiums.  These employers tell their workers that they are being hired as either “independent contractors” or as “1099 employees,” both of which have the same effect.  Many workers do not know that such a designation is meaningless – what matters is the actual business relationship between the employer and the worker.

What is an Independent Contractor?

            An “independent contractor” is a person who is in business for themselves and has the ability to either make a profit or realize a loss, depending on how their run their business.  This person is generally not an hourly worker, usually supplies his or her own tools, employees, materials and equipment and works for a company on a contract basis.  An independent contractor works for a number of different companies, and not exclusively for one company.  An independent contractor is “independent” in that he or she is not closely supervised by the company, but instead performs a task without supervision or direction by the company. Generally, the company would be just one of the independent contractor’s customers instead of their sole source of income.

What is an Employee?

            An “employee” is a worker who generally works exclusively and continuously for an employer, usually works on an hourly, piece-rate or salary basis, and is generally under the constant supervision and direction of someone who works for the company.

What Types of Companies Misclassify Employees as Independent Contractors?

            Employers in a number of different industries misclassify employees as independent contractors in order to avoid paying overtime. These are some examples of misclassification that we have seen in our practice:

• Drywall contractor who classified hourly workers as independent contractors.  These workers, who were properly employees, did not furnish their own tools, materials or equipment. Instead, they worked for the contractor continuously for months and years, working over 40 hours per week on the contractor’s jobs. After we sued this company twice, this contractor, instead of fixing the problem, had its supervisors set up a separate company to handle the payment of the workers, who it continued to pay as independent contractors.  We have now sued both companies, alleging an intentional violation of the FLSA.
• Construction company had its workers sign an independent contractor agreement, stating that they would be paid on a “per-square-foot” basis for work performed.  Thereafter, the company did not pay them on the basis set forth in the agreement, but instead paid the workers on an hourly basis.
• Oilfield services company paid its workers on a day-rate basis and called them independent contractors, even though they worked for the company for months and years, worked 5-7 days per week, using the company’s equipment and tools.
• Landscaping company paid its workers on a day-rate basis.  In the summer, these workers put in 10-12 hour days, 6 days a week.  They worked on 4-man crews supervised using the company’s truck, equipment and tools, and had no opportunity to earn any money over the day-rate they were paid.

What is the Effect of Misclassifying Workers as Independent Contractors?

            These companies, in different industries and paying their workers in different ways, have several things in common: 

• The companies are committing wage theft. By not paying their workers the overtime required by the Fair Labor Standards Act, the companies are depriving the workers of overtime pay that is rightfully theirs.
• The companies are avoiding paying required payroll and unemployment taxes.  By paying their employees as independent contractors, the companies are avoiding paying the employer’s half of Social Security and Medicare taxes, and are avoiding paying unemployment taxes since they are not acknowledging the workers as being employees.
• The companies are also gaining an unfair advantage over their competitors.  By not paying the required overtime and taxes, these companies are able to do their work more cheaply than their competitors, and thus illegally gain an unfair advantage over their competitors.

            Some employer-friendly attorneys and commentators discount the idea that wage theft occurs.  This is false.  Not only does wage theft occur, it is prevalent, and misclassifying persons who should be considered employees as independent contractors is a common way that companies commit wage theft.