Challenges to Independent Contractor Mislabelling

National Law Journal – Labor & Employment Special Report

With a weakened economy, employers are continually seeking new ways to cut costs. Although the reduction of employee headcount obviously can reduce the payroll budget, employers often still need people to perform the work. With that in mind, companies are more frequently turning to independent contractors to accomplish both goals—performing work at a lower cost and cutting down their payroll budgets. With independent contractors, employers have no obligation to withhold payroll taxes (or to fund the employer-matching portion of the Federal Insurance Contributions Act) or provide any benefits. Throw in the added advantage of having no overtime liability, and it is simple to see that the cost savings can be tremendous.

However, just as paying an employee a salary alone does not exempt the employee from overtime, merely labeling a worker as an independent contractor does not make one so. Increasingly, both government agencies and private citizens are fighting back against these misclassifications and seeking back taxes, benefits and other damages. Therefore, employers should use extreme caution when hiring workers solely as contractors.

Most employers realize that wage-and-hour collective actions dominate headlines and create significant problems for companies, regardless of their size. The U.S. Department of Labor (DOL) Wage and Hour Division’s statistics show that the agency recovered $185,287,827 in unpaid wages in fiscal year 2008—the most up-to-date report available. Department of Labor 2008 Statistics Fact Sheet, www.dol.-gov/whd/statistics/2008FiscalYear.htm. However, what cannot be told from those statistics is what percentage of the DOL’s cases involve misclassification of workers as independent contractors. Instead, the DOL classifies cases as minimum wage and overtime. Misclassification as an independent contractor would fit within the overtime category.

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