Most businesses are covered by the FLSA, but not all workers are included in its coverage. ICs are not subject to this law. Nor are employees who fall within any of the several exempt categories discussed below.
Caution Don’t Forget State Laws
This discussion only pertains to the federal wage and hour law. It does not address state laws, with which you must also comply. Contact your state labor department for more information.
1. When the FLSA May Apply
You are required to pay employees working for you either the federal minimum wage ($5.15 per hour) or, if your state has a higher minimum wage, you are required to pay that wage. One possible exception is for household workers. (See Hiring Household Workers and Family Members for guidance on hiring household workers.)
The reason you need to be concerned about the FLSA is because of overtime pay requirements. The FLSA requires that all non-exempt employees be paid an additional one-half times their regular rates of pay for all hours of work over 40 hours in a week. If you’ve classified as ICs workers who are really non-exempt employees under the FLSA, you will likely have to pay each misclassified worker an additional one-half of that worker’s regular rate for all hours worked in excess of 40 per week during the previous two or three years. This could be a substantial sum if your workers regularly put in long work weeks. If you refuse to pay, you could face legal action by the Labor Department or by the affected workers and possible fines. You could also be held personally liable for FLSA violations.
The Department of Labor doesn’t have the large investigative staff that the IRS does, but it doesn’t need it. It relies on complaints by disgruntled workers who believe they’re entitled to overtime pay. Since informants’ identities are kept confidential, and since they can’t be fired for complaining to the Labor Department, workers really have nothing to lose if they think they might qualify as employees and be entitled to the protection of the FLSA.
The main federal law affecting workers’ pay is the federal Fair Labor Standards Act or FLSA (29 U.S.C. §§ 201 and following), which establishes a national minimum wage and overtime standards for covered employees.
Before trying to determine how workers will be classified by the Department of Labor , you should first see if either your business or workers are exempt from FLSA coverage. You don’t need to worry about this particular worker classification issue or the Department of Labor if your business or workers are exempt.
2. Covered Businesses
Your business is covered by the FLSA if you take in $500,000 or more in total annual sales or if you’re engaged in interstate commerce. This covers nearly all workplaces, because the courts have broadly interpreted interstate commerce to include, for example, any business that regularly uses the U.S. mail to send or receive letters to and from other states or makes or accepts telephone calls to and from other states.
If your business is covered by the FLSA, it makes no difference how you compensate workers. If they are employees not exempt from the FLSA, they must be paid time-and-a-half for overtime. This is so whether they are paid by the hour, week or month; paid a commission on sales; paid on a piecework basis; compensated only by tips; or paid a set fee for the work.
Caution Businesses Exempt From the FLSA
A handful of businesses are exempt from the FLSA—for example, most small farms are not covered. It’s not likely your business falls within any of these exemptions, but for details of these exemptions, check with the nearest office of the U.S.
Labor Department’s Wage and Hour Division.
3. Workers Exempt From Overtime Requirements
Note Several categories of workers are exempt from the FLSA, even if their employer is covered by the law and even if they themselves are employees. They can work as much overtime as they want and you won’t have to pay time-and-a-half. The most common exemptions are for white collar workers and outside salespeople.
a. White-collar workers
Many white-collar workers are exempt from the FLSA. The FLSA divides such workers into three categories:
- Executives. Employees who manage two or more employees within a business or a department, and who can hire, fire and promote employees.
- Administrators. Employees who perform specialized or technical work related to management or general business operations.
- Professionals. Employees who perform original and creative work or work requiring advanced knowledge normally acquired through specialized study—for example, engineers and accountants.
To be exempt from the FLSA, these employees must be paid a minimum weekly salary or fee of $250 and spend at least 80% of the workday performing duties that require them to use discretion and independent judgment.
Resources
These exemptions are explained in a free articlelet titled Regulations Part 541: Defining the Terms—Executive, Administrative, Professional and Outside Sales. It’s available from the nearest office of the Wage and Hour Division of the U.S. Department of Labor. You can find a list of all the Wage and Hour Division offices throughout the country at www.dol.gov/esa/public/contacts/whd/america2.htm. You can also look in the federal government pages of your phone article.
b. Outside salespeople
An outside salesperson is exempt from FLSA coverage if he or she:
- regularly works away from your place of business while making sales or taking orders, and
- spends no more than 20% of work time doing work other than selling for your business.
Typically, an exempt salesperson will be paid primarily through commissions and will require little or no direct supervision.
c. Computer specialists
Computer system analysts and programmers whose primary duty is systems analysis, systems design or high-level programming are exempt from the FLSA if they receive a salary of at least $170 a week or, if paid by the hour, receive at least $27.63 an hour.
d. Other workers
Several other types of workers are exempt from the overtime pay provisions of the FLSA. The most common include:
- inside salespeople whose regular rate of pay is more than one and one-half times the minimum wage and who receive more than half their pay from commissions
- taxicab drivers
- truck drivers and other trucking company employees whose maximum working hours are set by the Department of Transportation
- employees of seasonal amusement or recreational businesses
- employees of local newspapers having a circulation of less than 4,000
- newspaper delivery workers
- announcers, news editors and chief engineers of certain small radio and TV stations
- employees of motion picture theaters
- switchboard operators employed by phone companies that have no more than 750 stations
- workers on small farms, and
- seafarers on all vessels.
4. Classifying Workers Under the FLSA
If a worker does not fall into any of the exempt categories discussed above, the FLSA will apply only if the worker is an employee. The Department of Labor and courts use an economic reality test to determine the status of workers for FLSA purposes.
The economic reality test is also used to determine employee state for the Family and Medical Leave Act (which entitles workers to unpaid leave under certain circumstances) and the Worker Adjustment and Retraining Act (which requires employers give advance notice of plant closings and mass layoffs). It is also applied frequently by courts in determining employee status in cases involving Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act and the Americans with Disabilities Act.
Resources You can find a lot of free information about these employment laws on Nolo’s website at www.nolo.com. Click on the Plain-English Law Centers Tab at the top of the home page. Then click on the Employment Law tab on the left side of the page. Under Employers’ Rights and Responsibilities, find the heading for Preventing Discrimination in the Workplace. There, you will find an article called Federal Anti-Discrimination Laws.
Under this test, workers are employees if they are economically dependent upon the businesses for which they render services. Economic dependence equals an employment relationship. This can be a rather difficult test to apply. After all, taken to its logical extreme, all workers could be considered employees because all workers, to some extent, are economically dependent on the people they work for.
As a general rule, however, the economic reality-test will classify as employees all workers who would be considered employees under the common law test (see Chapter 3 for an in-depth discussion of this test). It will also classify as employees workers whom government agencies and courts feel need and deserve the special protections. These are primarily low-skill, low-paid workers— the type of workers labor and workers’ compensation laws were originally intended to help.
This is borne out by the type of factors courts examine to gauge the degree of a worker’s dependence on a hiring firm. They include:
- the skill required to do the work
- the amount of the worker’s investment in facilities and equipment
- the worker’s opportunities for profit or loss
- whether the worker’s relationship with the hiring firm is permanent or brief
- the extent to which the services provided by the worker are an integral part of the hiring firm’s business
- whether the hiring firm has the right to control how the work is done, and
- the amount of initiative, judgment or foresight required for the success of the worker’s independent enterprise in open market competition with others.
Highly skilled, highly paid workers with substantial investments in tools and equipment are likely to be considered ICs under this test so long as they don’t work full time for just one firm. In contrast, a worker who doesn’t earn much, has low skills, no investment in tools or equipment and doesn’t have to use much individual initiative to earn a living will probably be an employee.
A few court decisions help illustrate what a judge may emphasize when applying the economic realities test.
In one case, a natural gas pipeline construction company hired pipe welders and classified them as ICs. Twenty of them sued the company, claiming they were entitled to overtime pay because they were really employees. The court concluded that the workers were ICs under the economic reality test and therefore not entitled to overtime pay. The court noted that:
- The welders’ jobs were highly specialized and required great skill.
- The welders moved from company to company and from job to job, usually working no more than six weeks at a time for any one company.
- The company exercised no control over how the welders did their jobs. Instead, the company’s customers specified the type of welding procedures to be used and then tested the finished results.
- The welders owned all their own welding equipment and trucks, with an average cost of $15,000.
- The welders’ success depended on using their initiative to find consistent work by moving from job to job.
Although they were paid an hourly rate, the welders’ opportunity for profit or loss depended mostly on their abilities to find work and minimize welding costs.
Based upon these facts, the court concluded that the welders were ICs. (Carrell v. Sunland Constr. Inc., 998 F.2d 330 (5th Cir. 1993).)
In another case, the Department of Labor claimed that a nightclub operator had incorrectly classified topless dancers as ICs and was liable for overtime pay and for failing to pay the minimum wage. The court agreed. Even though the dancers’ compensation was derived solely from tips they received from customers, the court found they were employees under the economic reality test. The dancers were economically dependent upon the nightclub because it set their work schedules and the minimum amounts they could charge for table dances and couch dances. Moreover, the club played the major role in luring customers through advertising, providing customers food and beverages and other means. The only initiative the dancers provided was deciding what to wear and how provocatively to dance. (Reich v. Circle C. Investments, Inc., 998 F.2d 334 (5th Cir. 1993).)
In some circumstances, it is possible for even skilled workers to be considered employees under the economic reality test. For example, one federal court found that professional nurses were employees protected by the overtime pay provisions of the Fair Labor Standards Act. This was so even though the court admitted the nurses were highly skilled, worked for several different patients or hospitals at a time, were free to decline referrals and exercised independence and initiative in the way they did their work. (Brock v. Superior Care, Inc., 840 F.2d 1054 (2d Cir. 1988).)
5. Avoiding Problems
The easiest way to avoid problems with FLSA overtime pay requirements is to prevent workers from putting in more than 40 hours a week. If a person is clearly an employee, you can simply prohibit him or her from working overtime. But if you classify a worker as an IC, you should not directly specify how many hours he or she should work—either orally or in a written IC agreement. Doing so makes the worker look like an employee, not only for FLSA purposes but for IRS and other purposes as well. It’s really none of your business how long an IC works. You can only be concerned with the results an IC achieves, not how the worker achieves them.
Avoid giving workers who are not clearly ICs more work than they can do in a 40-hour week. This may mean you have to plan ahead so you can lengthen deadlines or hire more ICs to do the needed work.
6. Recordkeeping Requirements
The FLSA requires you to keep records of wages and hours for employees. You do not have to keep such records for independent contractors.