CONTRACT LABOR
For seven decades, one of the most common methods used by prospective employers to avoid payment of overtime compensation has been to treat workers as "contract labor" or "independent contractors." This has resulted in back wage recoveries of many millions of dollars and a huge waste of employers' time in resolving the issues.
The Wage and Hour Division is well-aware of the fact that many employees who are paid only regular or straight-time wages will not be found on "payroll" records. DOL trains its enforcement staff to search out invalid "contractual" arrangements and to compute and collect back wages.
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The terms "contract labor" and "independent contractor" are commonly used in reference to workers who are perceived as being non-employees. That is valid if the relationship is truly one of a business nature and the subordinate party is actually in his or her own business. This is not likely to be the case with respect to most workers referred to as "contract laborers," and it is not the case in many "independent contractor" arrangements. The facts must be carefully reviewed in light of DOL enforcement policies and guidelines.
Under the FLSA and other laws enforced by the Wage and Hour Division, the definitions of "employ," "employee," and "employer" are very broad. While there is some sketchy guidance from DOL, there is no statutory or regulatory definition of "contractor" or "contract labor."
Whether a worker is an "employee" under Wage and Hour Division laws is generally based on "economic reality" considerations. A common mistake that employers and their advisors make is to rely on definitions and policies of IRS or other agencies. Even if your CPA believes that IRS will not take issue with you regarding 1099s vs. W-2 forms, DOL or the courts might take a much broader view of the possibility that the arrangement is actually "employment." In such a case, unless a valid exemption applies, you will have an obligation to pay premium overtime wages and a back wage liability will exist.
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