Independent Contractor vs. Employee and Overtime Pay

Overtime for 1099 Independent Contractors

A worker can be classified either as an employee or an independent contractor. Misclassification, whether intentional or due to a lack of understanding of California employment laws, is common. California wage and hour laws do not protect 1099 independent contractors since they work independently. Consequently, some employers misclassify workers as independent contractors to avoid paying overtime and other benefits. Orange County Workers Compensation Attorney assists individuals in recovering unpaid overtime compensation due to misclassification.

Overview of Overtime for 1099 Independent Contractors

Following the 2008 economic collapse, many U.S. employers increased their reliance on non-regular workers, leading to the rise of the 1099 economy. In this setup, workers receive a 1099-MISC form, indicating independent contractor status, instead of a W-2. A 2016 California study showed that 12.5 million people in the U.S. workforce are classified as independent contractors. Worker classification is not solely determined by the worker or employer.

Under California Labor Code 3353, an independent contractor is someone who offers or performs services for a specified amount of money, with control over how the services are delivered, as long as the desired result is achieved.

Employers benefit significantly from hiring independent contractors as they are not obligated to pay minimum wages, overtime wages, or payroll taxes. Overtime wages are extra payments for working more than the standard hours weekly or daily. However, independent contractors do not receive unpaid overtime, benefits, or minimum wages.

Due to these financial benefits, some employers misclassify workers. The State of California, in collaboration with the Internal Revenue Service (IRS), reviews worker classifications and imposes penalties for intentional misclassification, including double payment of owed wages.

Differences Between Independent Contractors and Employees

Significant differences exist between 1099 workers and employees. California employment law and the Fair Labor Standards Act do not apply to independent contractors, meaning they do not receive overtime pay. Employees, however, are protected by laws requiring minimum wages and overtime pay. Economic incentives for hiring independent workers have led to increased misclassification cases, but workers can recover denied overtime compensation.

Factors indicating employee status include:

• Employer supervision over the employee.
• Payment on a weekly, monthly, or hourly basis.
• Employer-controlled work schedules.
• Continuous relationship with the employer.
• Employer-provided materials and tools.
• Predetermined salary or pay.
• Formal or informal training by the employer.

Indicators of independent contractor status include:

• Freedom to determine work methods.
• Services provided outside the employer’s usual business activities.
• Payment on a project basis.
• Opportunity for personal profit or loss.
• Independence from the hiring entity’s control.
• A contract stating independent contractor status.

Reasons for Misclassifying Employees

Employees receive overtime wages, while independent contractors do not. Employers misclassify employees to:

• Avoid payroll tax filing.
• Bypass minimum and overtime wage obligations.
• Avoid providing meal and rest breaks.
• Evade liability for social security, disability, and unemployment insurance payments.
• Circumvent retaliation laws applicable to employees.

Service providers in California working over 8 hours a day or 40 hours a week are eligible for overtime wages unless misclassified as independent contractors. The IRS can help verify worker classification and recover owed overtime wages if misclassification is determined.

Commonly Misclassified Workers

Misclassification often occurs in:

• Information technology.
• Welding.
• Transport and trucking.
• Service technicians and installers.
• Construction.
• Oil and gas industries.

Employers avoid paying overtime by:

• Paying straight time for overtime instead of time-and-a-half.
• Using a day rate pay scheme.
• Employing a piece-rate system.

Proving Independent Contractor Status

The IRS uses the common law test, focusing on:

• Behavioral Control: Extent of the hiring entity’s control over how work is performed.
• Financial Control: The worker’s control over financial aspects, such as unreimbursed expenses and profit opportunities.
• Relationship: The nature of the relationship, including benefits and contractual agreements.

The 2018 California Supreme Court ruling in Dynamex Operations West Inc. vs. the Supreme Court of Los Angeles established the ABC test to classify workers. According to this test, workers are considered employees unless: (A) The worker is free from the employer’s control. (B) The work performed is outside the employer’s usual business scope. (C) The worker is engaged in an independently established trade, occupation, or business.

California Overtime Laws

Nonexempt employees are eligible for overtime pay if they:

• Work over 8 hours in a day.
• Work more than 40 hours in a week.
• Work over 6 days in a week.

Employees receive time-and-a-half for excess hours and double time for:

• Over 12 hours in a day.
• Over 8 hours on the 7th day of the week.

Employers must pay for unauthorized overtime worked, even if it violates company policies.

Filing an Overtime Claim

To file an overtime claim:

1. Submit a claim with the local Labor Commissioner.
2. The Deputy Labor Commissioner reviews and determines the claim’s validity.
3. If valid, a conference or hearing is scheduled.
4. If unresolved in the conference, the case proceeds to a hearing.
5. An order, decision, or award is issued. Unsatisfied parties can appeal in civil court.

Employer Violations and Employee Rights

Employees can file claims if:

• Misclassified as exempt or independent contractors.
• Employers violate California overtime laws.
• Required to work during rest or meal breaks.

The Statute of Limitations allows three years to file a lawsuit from the violation date.

Penalties for Misclassifying Workers

Penalties for misclassification include:

• Fines ranging from $5,000 to $25,000 per violation.
• Posting a notice of the violation for one year.

Related Worker Classifications

• Exempt Employees: White-collar workers exempt from overtime but eligible if certain conditions are met.
• Alternative Workweek Schedule: Agreements to work up to ten hours without overtime pay, with exceptions for overtime.

Employers must adhere to classification rules and provide appropriate compensation. Misclassified workers can seek legal assistance to recover owed wages and benefits.  If you are an employee and unsure whether you are an independent contractor or an employee, and are seeking overtime, contact E&L, LLP at (213) 213-0000 to have a free consultation regarding your employment matter.  At E&L, LLP, “Leave the Hard Work to Us.”