Independent Contractors and Overtime Pay Law

Print Friendly

What is the Law Regarding Independent Contractors and Overtime Pay?

Many persons are misclassified as “independent contractors” but are actually “employees” under federal, state and Illinois law for purposes of  the overtime pay laws.  Under the FLSA, true independent contractors are not employees and are not eligible for overtime compensation. Persons who work as real “independent contractors” are not entitled to the same monetary benefits and legal protections as “employees.” This is because independent contractors are not subject to the same types of restrictions, level of discipline, and fixed work schedules as are employees. Employers who treat their workers as “independent contractors” are subject to much less regulation those who treat their workers as “employees.” Employees have certain legal rights that independent contractors do not. Many employers purposefully misclassify employees as “independent contractors” to avoid paying overtime pay.

Employee or Independent Contractor?

The courts primarily use two tests to determine whether an individual qualifies as an employee or as an independent contractor: the “right to control test” and the “economic reality test.” They are both described below.

Right to Control Test

Also known as the “Master-Servant” or “Common Law Agency” test, the “Right to Control” test is often applied by the Internal Revenue Service (IRS) to differentiate employees form independent contractors. The key issue in the Right to Control test is the amount of control an employer exercises over the worker. Courts will look at the following factors to determine whether an individual qualifies as an employee or as an independent contractor:

  • How much control the employer generally exercises over the worker’s daily work;
  • Whether the occupation is a specialist job;
  • The degree of skill the job requires;
  • Whether the employer or the worker supplies the equipment that is necessary for the worker to complete his or her job duties;
  • The amount of time the worker has worked by the employer;
  • Whether the type of work being performed is part of the employer’s regular business;
  • Whether the worker has been hired to perform similar jobs for other employers;
  • Whether there is a mutual understanding that an employer/employee relationship has been established;
  • How the worker is paid, specifically, whether the worker is paid on an hourly or salary basis or paid per project or job completed.

Economic Reality Test

This is a much broader test that is applied by the Department of Labor. Unlike the control test, the economic reality test takes into account the economic realities as a whole. The Department of Labor will weigh the following factors when classifying a worker as an employee or as an independent contractor under the Economic Reality Test.

  • How much, if any, of an investment the worker has in the facilities or work equipment;
  • The type or level of control a company has over the worker;
  • The worker’s potential for profit or loss;
  • The degree to which the worker’s independent initiative, judgment and planning in market competition with others is necessary for the success of the worker’s operation;
  • How permanent the relationship is between the two parties;
  • How vital the worker’s services are to the business;
  • The worker’s level of dependence on the employer for future work.

Because FLSA overtime laws are intended to apply to as many workers as possible, the factors listed above are made intentionally broad so that a greater number of workers may be classified as employees.

Typical Problems

One of the most common problems is in the construction industry where contractors hire so-called independent contractors, who in reality should be considered employees because they do not meet the tests for independence, as stated above.

Franchise arrangements can pose problems in this area as well. Depending on the level of control the franchisor has over the franchisee, employees of the latter may be considered to be employed by the franchisor.

A situation involving a person volunteering his or her services for another may also result in an employment relationship. For example, a person who is an employee cannot “volunteer” his/her services to the employer to perform the same type service performed as an employee. Of course, individuals may volunteer or donate their services to religious, public service, and non-profit organizations, without contemplation of pay, and not be considered employees of such organization.

Trainees or students may also be employees, depending on the circumstances of their activities for the employer.

People who perform work at their own home are often improperly considered as independent contractors. The Act covers such homeworkers as employees and they are entitled to all benefits of the law.