The slimy trick companies use to ignore wage and overtime laws

Before the progressive era our forebears in New England faced intolerable working conditions. Child labor, long hours, dangerous conditions, and poor pay characterized factories and farms. Labor unrest eventually forced laws to protect union organizing. As workers’ power grew the people demanded laws for minimum wages and overtime, social security, workers’ compensation, unemployment insurance, and safer workplaces.

Even as union power ebbs, these laws are still too popular for the business establishment to directly attack. These protections only apply to employees, however, and employers have figured out a pernicious trick to get around them: They simply label their workers independent contractors and think they have magically erased all of the laws.

As an attorney, I’ve represented Maine workers in many different industries who were denied overtime or minimum wages because they were misclassified as independent contractors. The construction industry historically has been the biggest offender, but the problem is now so pervasive that people often don’t even believe me when I say that it is illegal.

I have one client who worked for a company for months before being told he had the option of continuing with basically the same job, but as an independent contractor. He was instructed to go to an accountant inside the company headquarters building to create his own LLC. Then he literally went to the company store to lease and buy equipment. He was paid for the amount of work he completed, so when there was a lot of work he did fine, but in slow weeks, after the company deducted his equipment “rental” he didn’t even make minimum wage.

There are lots of misconceptions about independent contractors, partially caused by different standards for worker’s compensation, taxes, and state and federal wages. People think if you bring your own tools, you are always an independent contractor, but that’s just wrong.

Fortunately, when Congress passed the Fair Labor Standards Act and other labor protections during the New Deal they were cognizant of this risk. They enshrined an incredibly broad definition of employment as “to suffer or permit to work.” The way the courts have interpreted this is based on the “economic realities” of the situation. Is the worker really in business for himself, or is he ultimately economically dependent on the employer?

In other words, courts don’t care about the label, even if the worker signed an independent contractor agreement, and just examine if the worker is really an independent businessperson.

Last week, the United States Department of Labor (DoL) released clear guidance to try to reverse the growing misclassification trend. The DoL administrative interpretation lays out six factors to determine if the worker is economically dependent on the employer. No single factor is determinant, but they should all be evaluated with the expansive definition of employment in mind.

  1. Is the Work an Integral Part of the Employer’s Business?
  2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
  3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
  4. Does the Work Performed Require Special Skill and Initiative?
  5. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
  6. What is the Nature and Degree of the Employer’s Control?

In other words, independent contractors are truly in business for themselves. They invest in marketing, equipment, or office space and do jobs that require that they use their own initiative and skill. Typically, they provide services for many different customers, and they control how and when they do the work. A technician that occasionally fixes my law firm’s computers is not my employee, but she would unquestionably be an employee if she worked 45 hours a week fixing computers at a computer store.

One common reason for misclassification is to avoid paying overtime at time and a half. The good news is that employees misclassified as contractors can seek back pay for all of their overtime. If that computer store tried to call the technician an independent contractor, a court would order the store to pay unpaid overtime for five hours a week along with statutory damages, and in Maine they would look back up to six years.

The government can only do a few spot inspections here and there. So we can only change this corporate culture that abdicates its responsibility for its workforce by standing up and demanding rights as employees. It is a serious offense for employers to punish workers that make claims for unpaid wages, so there is no real threat of retaliation as long as the complaints are documented.

If we believe in minimum wage, overtime, and unemployment insurance we must educate fellow workers and encourage each other to make formal complaints. Only when employers face a legitimate threat of being sued for back wages and serious statutory damages will they have the incentive to stop pretending their workers aren’t employees.

Photo via Flickr/J Mark Dodds

About Andy Schmidt

Avatar photoAndy Schmidt is a Maine attorney and expert on the Fair Labor Standards Act. He graduated from Dartmouth and the University of Virginia School of Law and founded Towards Justice, a nonprofit that fights wage theft among low-income workers.

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