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Independent Contractor Overview
An independent contractor is a worker who is not directly employed by a company, but completes work for that company. Many different factors determine whether a worker is an employee or an independent contractor, but some workers are misclassified as independent contractors to help the company save money.
Supreme Court Weighs in on Misclassification
The U.S. Department of Labor’s Wage and Hour Division is responsible for the administration and enforcement of worker protection laws, including the Fair Labor Standards Act (FLSA).
The Wage and Hour Division receives complaints regarding the misclassification of workers who believe they qualify for “employee” status rather than that of independent contractor.
According to the Department of Labor, the U.S. Supreme Court has not indicated there is one rule for determining the worker’s status, but has determined several factors that deserve consideration when making the determination of whether a person is an employee or an independent contractor. These critical factors include:
- The extent to which the services rendered by the worker in question are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control principal has over the worker.
- The alleged independent contractor’s opportunities for profit and loss.
- The amount of open market competition with others that is required for the success of the alleged independent contractor.
- The degree of independent business organization and operation.
How You’re Paid Matters
In most cases, an independent contractor provides the business with an invoice for the work completed. This is different from the employee, who receives a paycheck on a regular basis.
The payment provided to an independent contractor does not have any taxes or Social Security taken out, nor does the payment have any benefits paid. An employee receives sick time and vacation time, which are sometimes lumped into PTO (paid time off), possible retirement benefits, medical benefits and other perks that are reflected on the paycheck stub. An independent contractor receives none of these benefits.
An independent contractor is not covered by employment and labor laws. There’s no workman’s compensation for an independent contractor, nor any unemployment benefits.
Misclassified Workers File Wage and Hour Lawsuits
In the year 2000, the Department of Labor determined that almost $200 million in Unemployment Insurance tax revenue went unpaid during the 1990s when millions of workers were misclassified.
Uber, Lyft, Pizza Hut and FedEx are just some of the companies that have faced or are facing wage and hour class lawsuits regarding the alleged misclassification of workers.
In June 2016, Fed Ex agreed to a $240 million class action settlement regarding allegations its drivers were misclassified as independent contractors. That settlement benefited 12,000 drivers in 20 states.
In March 2019, Uber settled a misclassification lawsuit for $20 million with drivers in the states of California and Massachusetts, but the company refused to change the status of the drivers to employee.
