Independent Contractor Overtime Pay: Key Facts Employers and Contract Workers Should Know
What Is an Independent Contractor?
A significant percentage of the workforce in the United States do not classify themselves as employees, but rather as independent contractors. An individual who is classified as an independent contractor works on a contractual basis rather than as an employee for an employer. Independent contractors are distinguished from other workers based on the type of work they perform. A worker, for instance, can do similar tasks as an employee, and yet be classified as an independent contractor. Another example of independent contractors could be freelance workers — they may offer the same services as employees, but are not considered to essentially be the other party’s "employee." The main element that characterizes an independent contractor is that he or she performs a job outside of the usual course of business for a company or professional practice. In other words, if a person is hired to operate a business or practice, their assistant would likely be classified as an employee as the person’s right hand. But if that person delivers lunch to the office, the lunch deliverer would be classified as an independent contractor.
Legal Criteria for Independent Contractors
Overtime pay does not apply to independent contractors , but businesses must take care to properly analyze whether a worker to whom they give the classification of independent contractor is actually eligible for such a designation. In some cases, an employer may face litigation related to unpaid overtime wages if it classifies an employee as an independent contractor. The definition of an employee is not quite as clear. In general terms, an employee is someone who provides services for another under the express or implied control and voluntary acceptance of that other. In other words, the relationship is based on mutual consent. The general legal criteria that influence whether or not a worker is classified as an independent contractor in Texas include the power of the hiring party to terminate the relationship; the individual’s investment in facilities or equipment, and the absence of these elements from the hiring party’s control and discretion; the skill necessary for the job; who services the defendant or plaintiff; whether the hiring party controls the location of the individual’s work; the way the work is performed and how much autonomy the worker has in determining how the work is done, including the hours; the kind of relationship that exists between the hiring party and the individual, as defined by a written agreement, term length, payment method and the general nature of the work.
Overtime Laws
Although independent contractors are generally exempt from overtime requirements, there are important exceptions. Entities that misclassify employees as independent contractors do so at their own peril, as they may face significant liability for failing to pay overtime.
There is no uniform federal law that addresses the issue of overtime except for those provisions specifically addressing overtime pay for "enterprise" employers under the Fair Labor Standards Act ("FLSA"). The FLSA includes various exemptions, some of which allow employers to pay "salaried" workers a fixed amount of pay each pay period without regard to the number of hours worked. Such employees can include highly skilled computer personnel, certain administrative, professional and executive employees, and "outside" salespersons.
The FLSA overtime provisions, however, do not apply to independent contractors, as they are not "employees" within the meaning of the FLSA’s overtime provisions. However, where entities treat certain employees as "independent contractors," such misclassifications can result in the employees being entitled to overtime pay.
Businesses should note that some states have enacted their own overtime rules which differ from the FLSA provisions and which may apply to independent contractors in certain circumstances. Entities that employ teachers and certain additional professionals, such as nurses or computer professionals, may also be exempt from state-specific overtime requirements in certain states.
Are Independent Contractors Entitled to Overtime?
According to the FLSA, the "white collar" exemptions provide relief from the overtime requirements for certain employees who are employed "in bona fide executive, administrative, professional, outside sales and some computer employees capacities." 29 § 213(a)(1).
Under the credit system set out in 29 CFR 778.100, "hours worked" includes all time the employee is "required to be on duty or to be available for work", but is not limited to "time actually spent in physical or mental exertion for the employer’s benefit." FLSA 29 (a)(2).
The DOL states that hours worked are ". . . time during which an employee is at work, or is allowed to be on duty[.]" 29 CFR 785.16.
The Department of Labor (DOL) does not recognize independent contractors as qualifying for the FLSA overtime protection. Applying the DOL’s five-part Galbreath test, the FLSA overtime protections do not apply to independent contractors:
- Do they realize a profit or loss?
- Do they make their services available to the public?
- Do they hire and pay any helpers?
- Do they have a significant investment in their business?
- Do they regularly perform services for other clients?
An employee cannot waive their rights under the FLSA. Kennett v. Aitx, Inc., 71 F.3d 100 (8th Cir. 1995); Allen v. Atlantic Richfield Company, 202 F.3d 776 (10th Cir. 2000).
Misclassification and Exceptions
Exceptions and the Misclassified Independent Contractor
Unfortunately, even businesses that are attempting to comply with the law may mis-classify certain employees as independent contractors. When this happens, the employer may be liable for back overtime pay. It is also possible to mis-classify individuals as exempt from overtime when they are not.
There are two typical (and legally poor) scenarios in which you might find yourself responsible for paying overtime to independent contractors.
If your independent contractor should have been classified as an employee, you may become responsible for paying back overtime to that independent contractor. This can happen even if you had no way of knowing that the individual you used to perform work was supposed to be classified as an employee. The distinction between "independent contractor" and "employee" has been discussed in posts like this one, and a general rule of thumb is that if you control the work of an individual who isn’t incorporated, that individual should probably be classified as an employee.
Misclassifying a worker as exempt means that the employer believed the worker was entitled to exempt treatment (and thus, not entitled to overtime) under the law, while an enforcement agency believed that the individual should have received overtime because he or she did not meet the requirements for exemption . As is the case with independent contractors, this can happen even if the employer had no reason to believe their classification of employee was incorrect.
When it comes to misclassification, there are two options. If you are an employer, then you may have come to an agreement with the independent contractor, and/or the federal Department of Labor and the applicable state enforcement agency. The end result is that the government now knows that the independent contractor is actually an employee, and you are required to pay back overtime to that individual.
The second is fighting back, usually in court. While you can sometimes store up your claims for overtime against a former employer for a longer period of time (and sometimes, against more than one employer), there is a statute of limitations (usually two years) for bringing an overtime claim in federal court. If you are an employee and believe that you have an enforceable claim for back overtime, it is important to act sooner rather than later.
It is important to note, however, that while a misclassification can lead to liability for back overtime, there are other repercussions from misclassifying an employee as an independent contractor. For example, if you are a contractor who believes you were an employee, you may be subject to liability for unemployment compensation for the period of time when you were not an employee. Medical insurance is another type of statutory liability that may be imposed on employers in this situation.
Understanding Your Rights as an Independent Contractor
When working as an independent contractor, it is important to protect your rights and interests to ensure that you are fairly compensated for your work. One best practice is to have a clear and detailed contract with your employer that outlines the terms of your engagement, including the amount of time you are expected to work, your hourly rate, and any overtime pay or benefits to which you may be entitled. Having a written contract can help to avoid disputes over payment and duties, and can serve as evidence in case a legal matter arises.
In addition, it is crucial to stay informed of the latest developments in labor laws and regulations. Many cities and states have passed their own laws regarding independent contractors, and failure to adhere to these laws can result in lawsuits and other legal trouble. Seeking the advice of a qualified employment law attorney can help determine if there are any particular risks for independent contractors in your state, and to help enforce your legal rights should they be violated.
Contacting an employment law attorney can also help determine whether you have been misclassified as an independent contractor when you should have been classified as an employee. If you are owed back wages, an attorney can assist in enforcing your rights against your employer.
Conclusion: Duties and Obligations of Contractors and Employers
Independent contractors and employers both have a responsibility to respect labor classifications – and the law – when it comes to overtime pay. To ensure FLSA compliance, it is critical for both independent contractors and employers to understand what "independent contractor" duties, roles, and responsibilities may require.
Courts are unlikely to find that an employee is exempt from overtime pay if they are "primarily" performing non-exempt duties, even if the total hours they spend performing non-exempt work do not exceed 20 percent of their working hours . Further, an exempt employee would likely be non-exempt if they engaged in non-exempt activities beyond 40 hours in a given workweek. So, FLSA compliance requires at least an understanding of whether your work might be considered exempt. For independent contractors, this may mean assessing the work requirements for the project, as well as determining if their rate is competitive with the market. Undoubtedly, improper classification can lead to significant liability over time.