Employers often believe that the manner in which they label an individual working for/with the company is the accurate label, simply because the employer says so. Such is the case with the labels of independent contractor and employee. To truly understand the importance of these labels, it is essential that you know the ways in which the law treats independent contractors and employees, differently. Typically, employees receive more protection than independent contractors on the basis that independent contractors are, essentially, in business for themselves and do not serve at the will of the employer. Therefore, independent contractors do not benefit from an employer’s health insurance policy, are not entitled to FMLA leave, do not receive overtime pay, are not required to be paid a minimum wage and, often, cannot benefit from unemployment compensation insurance, all of which employees are likely entitled to. Additionally, for the most part, independent contractors do not have taxes withheld from their earnings, though, it should come as no surprise that the income must still be reported and taxed.
Given the ways in which independent contractors are treated differently than employees, it is not hard to understand why employers, at times, strive, to label those who work for/with the company as independent contractors even though the facts and circumstances do not necessarily support such a designation. According to the U.S. District Court for the Southern District of Ohio, that is exactly what Cascom, Inc. (“Cascom”) did and that is why Cascom is now liable for $1,474,266 in damages.
The lawsuit, which was filed by the U.S. Department of Labor, alleged that Cascom misclassified approximately 250 cable installers as independent contractors in violation of the Fair Labor Standards Act (“FLSA”). The outcome of the misclassification and the resulting violation of the FLSA was that Cascom cable installers were denied overtime compensation for hours worked in excess of forty (40) hours per week. As a result of this FLSA violation, Cascom was found to be liable for $737,133 in back wages (the amount that the 250 cable installers were entitled to for hours worked in excess of forty (40) hours per week) and an equal amount in liquidated damages. The damage award is collectible against both the company, which has now, ceased operations, and against the owner of the company.
Secretary of Labor Thomas E. Perez has heralded the decision as bringing “justice to workers and their families by providing them with their rightfully earned wages” and restated the Labor Department’s commitment to ensuring compliance with the FLSA to “protect middle-class workers and to level the playing field for responsible employers.
In order to act in accordance with the law, employers must become knowledgeable as to what distinguishes an employment relationship from an independent contractor relationship. “An employee-as distinguished from a person who is engaged in a business of his or her own-is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business that he or she serves.” While it may sound simple enough, making the proper designation is not that simple. According the U.S. Depart of Labor website, the relationship designation is not based upon a single characteristic, but is, instead, based upon the entire circumstance surrounding the relationship.
“The factors that the Supreme Court has considered significant, although no single one is regarded as controlling are:
(1) the extent to which the worker’s services are an integral part of the employer’s business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business’ overall process of production? Does the worker supervise any of the company’s employees?);
(2) the permanency of the relationship (example: How long has the worker worked for the same company?);
(3) the amount of the worker’s investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?);
(4) the nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);
(5) the worker’s opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and
(6) the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).”
This area of law seems to be confusing, at best. Employers should tread lightly in the hopes of not succumbing to a hidden pitfall. Quite frankly, when in doubt as to what type of relationship exists, employers should probably err on the side of the employer-employee relationship. To label an individual as an independent contractor when the argument could be made otherwise, could open up an employer to a significant amount of liability, as is clear from the Cascom case. Moral of the story: do not assume that a designation is correct because you [employer] say it is. Instead, seek the advice of an attorney.
As with any rule, there are exceptions.
Please seek professional assistance with any questions or specific situations.
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