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Claim Your Free Copy of Top 100 FLSA Overtime Q&As

We’ve compiled a list of the 100 most commonly asked questions we have received on the federal Fair Labor Standards Act (FLSA) overtime regulations.
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This report, "Top 100 FLSA Q&As", is designed to provide you with an examination of the federal FLSA overtime regulations in Q&A format, including valuable tips for bringing your workplace into compliance in an affordable manner.

At the end of the report, you will find a list of state resources on wage and hour issues. This report includes practical advice on topics such as:
  • FLSA Coverage: How FLSA regulations apply to all employers and any specific exemptions from the overtime requirements
  • Salary Level: Qualifying for exemptions and nonexempt employees
  • Deductions from Pay: Deducting for violations, disciplinary reasons, sick leave, or personal leave

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October 05, 2004
Were 'Independent Contractors' Actually Employees?

If an employer has the right to control what work an individual does and how, that individual must be treated as an employee. That holds true even if the employer has a contract with the individual, establishing an independent contractor relationship.

What happened. Randy Hill and Ernest Blake worked as long-haul truck drivers for Time Auto, under separate independent contractor agreements with the company. Neither driver was allowed to perform work for individual profit in between jobs for Time Auto; both had to wait for a Time Auto dispatcher to assign work to them.

Both drivers also had an agreement with the company to lease equipment. Hill and Blake were each required to make a $10,000 down payment on the equipment, as well as "substantial monthly payments" after that. The lease agreements stated that Hill and Blake would lose their investments if they were terminated for inadequate performance. The independent contractor and lease agreements could be terminated at will without cause.

Time Auto terminated its contracts with Hill and Blake on the basis of the drivers' involvement in activities of Local 299, International Brotherhood of Teamsters, AFL-CIO. However, an administrative law judge found that the two drivers were actually employees of Time Auto, and in terminating them because of their union activities, the company was in violation of the National Labor Relations Act. A majority of the National Labor Relations Board affirmed that decision, and the company appealed to the U.S. Court of Appeals for the 6th Circuit.

What the court said. On appeal, Time Auto argued that:

  • Its relationships with Hill and Blake were structured as independent contractor relationships.
  • Hill and Blake were allowed to hire drivers to work for them.
  • Payments were made to the drivers' corporations­not to them as individuals.
  • They were paid on a percentage basis (so they had an opportunity for profit and loss).
  • They had to pay the costs of operating, maintaining, and repairing their tractors and trailers.

The appeals court affirmed the National Labor Relations Board's decision, saying, "substantial evidence supports the Board's determination that Time Auto asserted such control over Hill and Blake as to make them its employees."

Time Auto Transportation, Inc., and Time Auto Transport, L.S. v. National Labor Relations Board, Nos. 03-1194/1271, U.S. Court of Appeals, 6th Cir. (7/23/2004).

The Law

Employers do not pay employment taxes for independent contractors and do not withhold federal, state, and local taxes from payments made to independent contractors. Independent contractors are not included in an employer's benefits programs, and they are not eligible for unemployment insurance benefits. They are also exempt from wage and hour and employment discrimination laws.

IRS has guidelines to assist employers in correctly identifying and classifying employment relationships:

For a Limited Time receive a FREE Compensation Special Report on the "Top 100 FLSA Q&As," designed to provide you with an examination of the federal FLSA Overtime Regulations in Q&A format, including valuable tips for FLSA Coverage, Salary Level, and Deductions from Pay. Download Now
  • "Reasonable basis" test. This test provides a "safe harbor" to employers based on existing government or court classifications of workers in a particular business or industry.
  • The common-law test. This test is based on the "right to control" the work that is performed. If the employer controls the work, an employment relationship exists. Conversely, if the worker controls the work, the relationship can be classified as that of an independent contractor.

What to Remember

If you work with independent contractors, here are some steps to take to ensure success:

  • Review the current status of positions. Even though certain positions may have been classified as an employee or independent contractor status in the past, working arrangements typically change over time.
  • · Use IRS checklists as a guide. The Internal Revenue Service has created checklists for determining employee status and for identifying indicators of independent contractor status.
  • Look at the big picture. No one indicator of independent contractor status is determinative. However, the all-important issue is who has the right to control the work as to when and how it is completed. In this case, the appeals court noted that certain factors suggested an independent contractor status. For example, "? Hill and Blake paid for their own expenses, received no company benefits, and could hire drivers to work for them," but those factors didn't outweigh the "substantial evidence" that Hill and Blake were employees of the company, the court said.
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