Federal and state regulators show no signs of backing off their effort to crack down on the misclassification of employees as independent contractors.
Through a “Misclassification Initiative,” the U.S. Department of Labor (DOL) continues to actively engage state regulators in a joint effort to investigate and enforce provisions of the Fair Labor Standards Act (FLSA) involving the misclassification of employees as independent contractors. Over the course of last three years, the DOL signed several “Memoranda of Understanding” with 15 states to share information and coordinate efforts to investigate employers for misclassifying employees.1 These joint efforts present a serious risk to employers. In the last two years alone, the DOL has collected more than $18.2 million in back wages from employers for more than 19,000 workers.2
The consequences of prosecution by the DOL for violating the FLSA can be extremely costly and sometimes catastrophic to a business. Solis v. Cascom, Inc., Case No. 3:09-cv-257 (S.D. Ohio August 27, 2013), is a recent example of the impact of DOL prosecution for misclassifying employees as independent contractors.
In Cascom, the DOL brought an action against the company asserting FLSA violations. After a non-jury trial, the court found the company violated the FLSA by misclassifying its television cable installers as independent contractors and failing to pay overtime wages for work in excess of 40 hours per week. The court held the installers were employees and therefore were entitled to protection under the FLSA. Based on the court’s findings, Cascom was ordered to pay back wages in the amount of $737,133.13—plus an additional $737,133.13 in liquidated damages.3
Cascom and other recent cases reflect the increased scrutiny employers are under, and the expensive consequences of DOL prosecution.4 Even the most diligent employers with the best intentions are at risk of landing under the microscope of the DOL’s Misclassification Initiative. The Supreme Court has emphasized that “putting on an ‘independent contractor’ label does not take the worker from the protections of the FLSA.”5 There are many factors to consider that distinguish an employer-employee relationship from an independent business (contractor) relationship.
In a recent Minnesota case Solis v. Hawkins Tree and Landscaping Inc., Case No. 10-cv-3848 (D. Minn. Apr. 18, 2012), the DOL commenced an FLSA action for misclassifying workers as independent contractors and failing to pay overtime wages.6 In a consent judgment, the district court ordered the defendants to pay $478,000 to 57 current and former employees for violations of the FLSA, including $278,000 in back pay, $278,000 in liquidated damages, and an additional $22,000 in civil money penalties. The consent judgment held the corporation and its owners jointly liable. The court also ordered the employer to hire an independent auditing firm for four years to conduct bi-annual audits of its pay practices.
Unfortunately, there is no one test for determining whether a worker should be classified as an employee or independent contractor. Instead, the test to apply will vary depending on the purpose of the test – for example, compliance with IRS or with regulations bearing on minimum wage/overtime or unemployment. Regardless of the objective, the analysis is always fact-driven on a case-by-case basis and subject to state rules. We will discuss examples of the various tests in future articles.
All companies rely on independent contractors, but there are limits to these business-to-business relationships under the FLSA and many other state and federal laws. It is important for employers to be proactive in reviewing their relationships and contractual agreements with businesses and individuals the company considers to be independent contractors but for whom regulators may have a different view.
By Cliff Anderson, Kristin Kingsbury and Marcus Urlaub
This article is published for general information purposes only. Its contents should not be construed as legal advice or opinion. If you have any questions, you are urged to contact a lawyer concerning your specific legal situation. For further information, please do not hesitate to contact the authors of this article.
1States involved in the Misclassification Initiative include: California, Washington, Utah, Colorado, Montana, Minnesota, Iowa, Illinois, Missouri, Louisiana, Maryland, New York, Connecticut, Massachusetts, and Hawaii; www.dol.gov/WHD/workers/Misclassification/index.htm)
3Under the FLSA, employers who violate the Act are liable for back pay, plus an additional equal amount as liquidated damages. 29 U.S.C. § 216(b). Misclassification also exposes employers to back pay of FICA payroll taxes pursuant to the IRS’s Voluntary Classification Settlement Program, launched in September 2011. Employers should be aware that the DOL, IRS, and state labor governments are increasingly sharing information about worker classification.
4For a list of recent cases prosecuted by the DOL click on the following link: www.dol.gov/WHD/workers/Misclassification/pressrelease.htm
5Solis v. Cascom, Inc., 3:09-CV-257, (S.D. Ohio Sept. 21, 2011) (citing Rutherford Food Corp. v. McComb, 331 U.S. 722, 729 (1947)).