The scene: Sunday morning living room in the Olney household. Dad is reading the paper, Mom is attending to her smart phone, Dog is keeping a careful eye on the outside world, Son is wearing an expression of deep thought.
Son: Dad, I want an allowance.
Dad: Don’t we all.
Son: I’m serious. Will you give me some money?
Dad: Child, while you and your sister are certainly the greatest gifts that could ever have been bestowed upon us, believe me, you were not free gifts, and I “give” you money all the time in the form of a house, food, clothes…
Son: C’mon Dad, you know what I mean.
Dad: (Putting down paper) Fine. Make your case: What have you done to earn an allowance? Bonus points may be awarded for the use of spreadsheets and PowerPoint.
Son: Well, I made my bed.
Dad: Having already been in your room once this morning, unless by “made” you mean that you actually built the frame upon which your bed sits, I would suggest that its current state of dishevelment might better be characterized as “unmade.”
Son: I didn’t say I made it today. But I did make it two or three weeks ago.
Dad: I know you’re only nine, but it’s time you learned that resting on your laurels will bring neither future glory, nor, in this case, an allowance.
Mom: (Deciding to be snarky, rather than helpful) Perhaps the boy has earned an allowance simply by having to listen to you amuse yourself at his expense…
So what does any of this have to do with wage-and-hour laws? Well, the Federal Department of Labor (DOL) and its related state agencies are charged with making sure that employees are given the modern-day equivalent of an honest day’s pay for an honest day’s work. Employers who fail to do so can be subject to back-pay claims, penalties and attorneys’ fees.
In this context, the minimum definition of an honest day’s pay varies depending on whether the employee is exempt or nonexempt. Nonexempt employees generally must be paid at least minimum wage, and, at the federal level, be paid overtime for hours worked over 40 in a workweek (the point at which overtime kicks in can vary between the states). Exempt employees usually need to be paid a regular weekly salary of at least $484 (this amount is expected to increase within the next couple of years, and also varies by state).
However, no such obligations exist with respect to independent contractors, who are considered non-employees. As a result, independent contractors can be paid at whatever rate they agree to accept and aren’t entitled to overtime, minimum wage or any other wage-and-hour protections.
As I’ve pointed out in previous posts, the threshold for determining independent contractor status can be quite high, and verifying them takes a lot more than simply issuing a 1099 or having a signed agreement.
Minnesota generally applies the same 9-factor test for wage-and-hour purposes that it does for workers’ compensation purposes (see my previous post). The federal DOL and Wisconsin’s Department of Workforce Development (DWD) apply similar 6-factor tests:
Illinois applies a variety of different tests depending on the circumstances. Here is the test used for unemployment purposes:
Illinois also has a law called the Employee Classification Act that applies to the construction industry, and which takes a very narrow view of who can be an independent contractor.
In early January 2021, the DOL announced a proposed final rule designed to clarify independent contractor status under the Fair Labor Standards Act (FSLA). The rule has since been withdrawn; however, because the rule never went into effect, withdrawing it does not change how independent contractor status is determined currently.
Previously, I outlined some of the serious implications of misclassifying employees in the context of work comp. The consequences of misclassification can be even greater when wage-and-hour concerns are involved.
Although a lot of attention is paid (and rightly so) to discrimination and harassment claims, the real money and enforcement efforts can be found in the world of wage-and-hour violations. There are two reasons for this.
The state and federal departments of labor are not going to accept on faith that you’ve properly categorized your independent contractors. Instead, they are generally going to presume that the individuals who perform work for you are employees unless you can objectively prove otherwise.
Since the wage-and-hour consequences can be pretty significant if you’re caught misclassifying employees as independent contractors, you should make sure to revisit anyone that you have an ongoing relationship with on an independent contractor basis. This is particularly true if you utilize numerous independent contractors as a regular part of your business.
In doing so, if you discover that you’ve probably misclassified one or more individuals who should have been treated as employees, you’ll have to decide what to do about it. Technically, you’re supposed to fix the problem in arrears, which means trying to figure out actual hours worked and potentially paying unpaid overtime going back for 2-3 years.
In turn, retrospective FICA and FUTA taxes would have to be paid, and W-2’s presumably issued. This brings us to the next, and final, installment in this series of blog posts on independent contractors – the IRS and state tax implications of misclassifying employees.
Stay tuned – and for more information, contact us.
James provides guidance to employers on a variety of topics with a focus on employment, risk management and liability issues.
James provides guidance to employers on a variety of topics with a focus on employment, risk management and liability issues. In addition to working directly with employers, he regularly conducts in-depth training through webinars, at client sites, and through the University of Minnesota’s Continuing Ed program. He previously was a plaintiff’s attorney and brings that perspective into his advice to employers. James received his law degree from the University of Minnesota and his BA from Washington University in St. Louis.
During the White House’s Summit on Working Families on June 24, 2014, President Obama indicated he was signing a presidential memorandum requiring every federal agency to address flexible work schedules and give employees the right to request such schedules. Absent what could be a dramatic increase in workplace flexibility for federal employees, it is undeniable that the demand for flexibility and work-life balance is on the rise.
On May 11, 2014, the governor of Minnesota signed the Women’s Economic Security Act (WESA), a bill that will require Minnesota employers to make dramatic changes to their employment policies and practices.
While WESA directly impacts employers who conduct business in Minnesota, the changes follow plans by federal and local governments to expand legal protections for women and other employees. For this reason, employers in other jurisdictions should pay close attention to these national and state law trends.
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