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.
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