CONSEQUENCES OF TREATING EMPLOYESS AS INDEPENDENT CONTRACTORS

There are numerous reasons employers often prefer to treat certain works as Independent Contractors, rather than employees.  To begin with, there is no obligation to ensure that an Independent Contractor is earning Minimum Wage for the time they spend performing work for the employer.  As a result, there is no need to pay overtime to an Independent Contractor who spends more than 40 hours a week conducting the work they contracted to do.  Similarly, there is no obligation to pay payroll taxes, workers’ compensation insurance, or to withhold the worker’s income tax.  Employers also do not have to abide by the Family Emergency Medical Leave Act, or concern themselves with any statutory obligations to offer health insurance to Independent Contractors.  Simply, it is easier and cheaper to treat workers as Independent Contractors than Employees.

As simple as it may seem in the short term, treating Employees as Independent Contractors can be extremely costly in the long run.  Any employer who routinely utilizes the same workers to perform the same job functions on a daily basis runs the risk of being found in violation of the Fair Labor Standards Act (FLSA) and in violation of State Wage and Hour requirements. 

Investigations by the Wage and Hours board normally start with a complaint from a disgruntled former employee, but if the investigation reveals violations pertaining to that employee, the investigation can be expanded to include all workers for up to 3, 5, or 7 years.  Employers found to have violated the Wage & Hour regulations may suffer fines in addition to having to pay back Unemployment and Workers Compensation payments.  They may also have to pay restitution to employees who are found to have been underpaid.  It is not uncommon for mid-sized companies (15-35 employees) to rack up $75-$100,000 in fines and assessments in Wage & Hour cases.

FLSA cases can be even more costly to employers.  These cases normally start with one or two disgruntled employees, but are often filed as collective cases including “all similarly situated” parties.  As the case matures, more and more Plaintiffs are often added.  If it is determined that the plaintiffs were treated as employees, and not paid minimum wage, the employer may have to pay up to 2 times the amount of wages that should have been paid over several years for each employee (or former employee) included in the suit, plus attorney fees.  These damages frequently add up to hundreds of thousands in damages.

Additionally, since FSLA cases target damages to the workers and Wage & Hour complaints target damages to the State for unpaid taxes and fees, the initiation of one case will often spark the filing of the other.  In the end, the easy, cheaper way to deal with compensating workers can very easily end up destroying your business. 

There are, however, ways to limit some of the risk your business may be at for its past violations of these to statutes and insulate your business from future violations.  These methods include modifying the employment contracts you are currently using and some small alterations in your current operating procedures.  To evaluate your company’s risk and ways to lessen those risks and comply with these statutes you should consult with an attorney familiar with these Employment Law issues.

Entertaiiners and Wait Staff/ Employees not Independent Contractors

The misclassification of employees as independent contractors occurs frequently, regardless of industry, and unfortunately, carries with it significant penalties.   Treating a worker as an independent contractor improperly will not only cost the employer damages for unpaid overtime, but can include damages for unpaid unemployment taxes, workers compensation premiums, payroll taxes, and employee benefits.

Recent federal cases in Texas, D.C., Atlanta, and elsewhere across the country have changed the way workers historically treated as Independent Contractors should be classified under the FLSA (Fair Labor Standards Act), and handing out major penalties to businesses for failing to pay minimum wage and overtime to mis-categorized workers. 

In determining whether workers are employees or independent contractors, the Courts rely on the "economic reality" test, which contains the following factors: (1) the degree of control exercised by the employer over the workers; (2) the workers' opportunity for profit or loss and their investment in the business; (3) the degree of skill and independent initiative required to perform the work; and (4) the permanence or duration of the working relationship; and (5) the extent to which the work is an integral part of the employer's business.

Based on this litmus test, setting schedules and enforcing work place rules shows an exercise of control consistent to that of an employee; the ability to earn tips does not equate to profiting from a capital investment; skill is not seen in the performance of activities to which there is no objective standard; high turnover rates is not the same as the temporary engagement of services; and the more your business needs the worker for the daily operation of the business, the more likely they are an employee.

There are several groups or classes of employees that are particularly prone to mis-classification as independent contractors.  The most prevalent groups that we have dealt with include wait staff and entertainers.  These workers are often compensated either sole by tips or on a job by job basis, and have varying degrees of limitations placed on their ability to work for other employers.

Regardless of how lucrative a bartender or waiter’s tip income may be, they will always be categorized as an employee and entitled to minimum wage and protection under FLSA.  Bartenders and other wait staff are usually required to follow a schedule or shift when working, with breaks regulated by the employer, which equates to an exercise of control over the work of the employee (Category 1 under the Economic Reality test).  These workers’ opportunity for profit is based entirely on the success of the employer; the workers don’t control the advertising, pricing, or costs of goods sold for the provision of the services which their work complements. (Category 2). Pouring drinks or serving plates requires very little skill, and even less entrepreneurial initiative. (Category 3).  Catering and other similar business that use service staff could not operate without those workers, so those workers are considered an integral part of the employer’s business. (Category 5).  A caterer who pays servers $50 plus tips to work an event will violate the FLSA if the $50 pay rate does not equate to minimum wage based on the hours required to work.  Those hours include set up and clean-up time.  The amount actually earned in tips is irrelevant.  The short term or irregularity in the frequency of the employment (Category 4) in this scenario, standing on its own, will probably not be enough to justify treating the worker as an independent contractor.