Independent contractors are not entitled to overtime pay. BUT that’s only when those independent contractors are truly independent contractors and properly classified as such. Millions of independent contractors throughout the country are misclassified. Instead of being independent, these people work for companies that control every aspect of their jobs. Properly classified, these workers should be W2 employees. As a result, many employees who are improperly classified as independent contractors have significant claims for overtime wages and other damages (e.g. taxes).
The Corporate Motivation to Misclassify
Some companies view misclassification as an easy way to save money. Here is a classic example: The Smith Mortgage Company hires a team of 30 sales agents to sell mortgages and refinancing via telephone. If handled properly, these 30 sales agents would be W2 employees of the Company. That means the Company has to pay payroll taxes. That also means the Company has to track their work hours and pay overtime wages. But the Company does not want to do that. As they see it, that would be too expensive. So, they classify everyone on the sales agent team as an independent contractor. The Company pays $500 per week, plus commission. The Company requires all sales agents to work a fifty-hour week (five ten-hour shifts, Monday through Friday). By improperly classifying the sales team as independent contractors, the Company is saving thousands of dollars each week. Situations like this are surprisingly common.
Independent Contractor vs. W2 Employee: The Legal Test
The IRS has published a 20-factor test that is used to determine whether someone should be classified as an independent contractor or an employee. Rather than walk through all twenty factors, I will summarize: The biggest question is control. The more control the company has over the worker, the more likely that worker should be classified as an employee. When a company controls work schedule, location, method, reporting requirements, and training (among other factors), that weighs in favor of classifying the worker as an employee. When the workers at issue are essential to a company’s functioning and survival, that weighs in favor of classifying those workers as employees.
When I started my own law firm almost a decade ago, lots of other lawyers gave me their unsolicited advice. I can remember several lawyers telling me that when I hired office staff, they should all be independent contractors— because it would save me money. Again, illegal but incredibly common. Think about it like this: An administrative assistant who works in an office, on a schedule set by the company, with a corporate email address, held out to the public as an employee of the company? That is clearly an employee, not an independent contractor.
In some situations, the question of proper classification is a close call. But in most situations, it’s not. In most situations, the law clearly weighs in favor of one or the other.
Independent Contractors & Overtime Wages
If misclassification is clear or likely (i.e. the worker should have been classified as a W2 employee), that opens the door to a claim for unpaid overtime wages. The Fair Labor Standards Act (FLSA) – the federal law that governs overtime wages – is incredibly complicated. I’ll translate it into simple terms: Blue collar workers are always entitled to overtime wages. In other words, if someone is doing physical work or labor, they should be paid overtime. For white collar or office workers, it’s a cluster. Professionals – such as doctors, lawyers, accountants, and pharmacists – are exempt (meaning they are not paid overtime). Highly educated professionals with advanced degrees are not paid overtime. Executives who run/manage a business or a division of the business are not paid overtime. Managers who make important decisions and can hire/fire employees are not paid overtime. Certain computer professionals and creative professionals (with full creative control over their work) are not paid overtime. Finally, traveling salespeople are not paid overtime. But most employees who do not fall into these categories should be paid overtime.
Many misclassified independent contractors do not fit into the above categories, meaning they are entitled to overtime wages (1.5X their ordinary hourly rate of pay) for all hours worked. Not only that, but the FLSA requires a court to award a successful plaintiff double that amount unless the company can establish that it acted in good faith. Consider this: A Company robs an employee of $100 a week worth of overtime that should have been paid. Over the course of a year, that’s $5,000. Under the FLSA, most claims in Florida go back 2 years but can go back 3 years if the court or jury find the violation was willful. Let’s say this was a willful violation. That’s $15,000. Now double it (because there’s no way the company can prove good faith if the violation was willful): That’s $30,000. So an employee who was robbed of $100 a week for three years would have a $30,000 overtime claim. Prevailing FLSA plaintiffs are also entitled to have their attorneys’ fees paid by the other side. And that’s before we get into separate damages based on misclassification.
Damages for Misclassification as an Independent Contractor
When a company saves money by misclassifying workers as 1099 independent contractors, a big part of that savings is payroll taxes. Rather than paying workers as W2 employees, the company pays them as contractors and shifts that tax burden to the workers. Independent contractors (1099) pay far more in taxes than W2 employees. That’s because an independent contractor is essentially paying all of the relevant taxes with no employer contribution (i.e. payroll taxes).
In my view, the best way to pursue a claim for misclassification under Florida law is via Florida’s Deceptive & Unfair Trade Practices Act. I don’t say that lightly. Lawyers and litigants should not mess with FDUTPA if they do not have an appropriate grasp of the statute and relevant case law. But in a case involving misclassification, I view FDUTPA as a viable course of action. Misclassification involves unfair and deceptive business practices. Misclassification causes actual, calculable damages (i.e. additional tax burden). It’s a real FDUTPA claim. That creates an additional hook for attorneys’ fees.
Jonathan Pollard is a competition and employment lawyer. He is the founder of Pollard PLLC, a Fort Lauderdale law firm that has extensive experience litigating employment cases. Pollard has appeared in or on The New York Times, Bloomberg, The Guardian, PBS NewsHour and more. He has been honored by Super Lawyers. The Firm’s office can be reached at 954-332-2380.