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Is it Legal to Classify Full-time Employees as Independent Contractors?

Authors: Courtney Sheaffer and Haley Paul

When it comes to taxes and payroll, it can sometimes seem like smart business to classify workers as independent contractors, rather than employees. After all, minimum wage and overtime laws, unemployment benefits, and employment tax do not apply to independent contractors, making such a classification seem like a relatively easy way for businesses to cut costs. What many business owners do not realize until it is too late is that the federal government is wise to this trick, and companies that misclassify employees as independent contractors can face steep penalties.

The Fair Labor Standards Act (FLSA) authorizes the Wage and Hour Division (WHD) to assess employers’ monetary penalties for each violation of the minimum wage and overtime requirements of the Act. In misclassification cases, this typically includes liability for two times the amount of unpaid overtime worked by the misclassified employee at time-and-a-half of the employee’s regular rate of pay.

Penalties add up fast, particularly because businesses typically do not track the hours worked by independent contractors, so they are at the mercy of the workers to testify as to the hours they worked, which are often inflated. In addition, the statute of limitations for FLSA violations is two to three years, depending on whether or not the WHD or court determines that the violation was willful. That can leave employers on the hook for two to three years’ worth of unpaid wages. Furthermore, an employee may bring a “collective action” in such cases, meaning multiple employees may join in the same lawsuit, and prevailing plaintiffs in FLSA actions are entitled to recover any reasonable and necessary attorney’s fees. That could mean hundreds of thousands of dollars in damages.

Are you doing enough to protect your business from such a possibility? If you are not sure, Stibbs & Co. can help. Our attorneys are experts in labor and employment law, and we routinely help clients reduce the potential for costly liabilities. If your workplace relies on contract labor and you have never engaged a labor and employment attorney to assess the classification of your workers, even honest mistakes can threaten the financial health and even survival of your business. Contact us today, and Stibbs & Co. can begin assessing the risks you face and charting a legally sound path toward success.