Misclassifying Employees

Misclassification of Employees To Avoid Paying Overtime

Employee misclassification—whether as exempt vs. non-exempt or as an independent contractor instead of a W-2 employee—is a common problem that can have serious consequences for workers. If you’ve ever wondered whether you’re truly exempt from overtime or if you’ve been treated as a 1099 contractor when you should have been on payroll, this section breaks it down in plain English.

What is Employee Misclassification?

Employee misclassification happens when a worker is incorrectly classified in a way that deprives them of legal rights or benefits. There are two main types of misclassification:

– Misclassifying an employee as ‘exempt’ from overtime when they don’t meet the criteria.

– Treating someone as an ‘independent contractor’ when they should legally be classified as an employee.

FLSA Misclassification: Exempt vs. Non-Exempt Employees

The Fair Labor Standards Act (FLSA) requires that most employees in the United States be paid at least the federal minimum wage and receive overtime pay for hours worked over 40 in a workweek. However, some employees are ‘exempt’ from these protections. To be properly classified as exempt, an employee must meet all three of the following tests:

– They must be paid on a salary basis (not hourly);

– They must earn at least $684 per week (as of 2024); and

– They must primarily perform job duties that fall under specific exemptions such as executive, administrative, or professional roles.

Job titles alone do not determine exempt status. For example, just calling someone a ‘manager’ doesn’t mean they are truly exempt. Misclassification often leads to employees missing out on earned overtime pay.

Independent Contractor vs. Employee: Misclassification Explained

Some workers are classified as independent contractors and paid using a 1099 form, instead of being treated as employees who receive W-2s. While independent contractors have more flexibility, they don’t get many of the legal protections employees do—like minimum wage, overtime, unemployment insurance, and employer-paid payroll taxes.

The Department of Labor and IRS use multiple factors to determine whether someone is truly an independent contractor. These include:

– Who controls how and when the work is done;

– Whether the worker can make a profit or loss;

– The permanence of the relationship; and

– Whether the work is integral to the business.

Consequences of Employee Misclassification

When employees are misclassified—whether as exempt from overtime or as independent contractors—they may face serious consequences that affect their financial security and legal protections.

• Loss of Overtime Pay: Non-exempt employees are entitled to overtime pay at one and one-half times their regular rate for all hours worked over 40 in a workweek. Misclassified employees may work long hours without receiving the overtime premium they legally earned.
• Payroll Tax Impact: Independent contractors are responsible for paying the full share of Social Security and Medicare taxes (self-employment tax), unlike employees whose employers must pay half. Misclassification can leave workers owing higher tax bills.
• Lack of Legal Protections: Employees are covered by many laws that do not apply to independent contractors, such as the Family and Medical Leave Act (FMLA), the National Labor Relations Act (NLRA), anti-discrimination laws, and unemployment insurance. Misclassified workers may be excluded from these protections.
• Limited Access to Benefits: Misclassified workers often lose out on employer-provided benefits such as health insurance, retirement plans, workers’ compensation, and paid leave.

In short, misclassification can significantly affect a worker’s wages, tax responsibilities, legal rights, and access to critical benefits.

Common Misclassification Examples

– An hourly employee paid a salary and told they are exempt, but they don’t manage anyone or use independent judgment in their work.

– A delivery driver who must wear a uniform, follow detailed instructions, and work full-time hours but is paid as a 1099 contractor.

– An administrative assistant who is told to clock out for a lunch break but continues working through it without pay.

The information provided above is for general informational purposes only and does not constitute legal advice. The Fair Labor Standards Act and related employment laws can be complex, and how they apply may vary based on the specific facts of your situation. If you believe your workplace rights have been violated, you should consult with an experienced employment attorney to obtain advice tailored to your individual circumstances.