A key concept under the laws enforced by the Wage and Hour Division is "employment relationship." This comes into play when there are "trainees," "volunteers," or "interns." It is not uncommon for employers to assume that such arrangements do not constitute employment. Given the very broad concepts applicable to "employ," "employer," and "employee" definitions under these laws, employers should be very cautious when making employment relationship determinations.
Employment relationship concerns also apply to "joint employment." Numerous scenarios may be construed as joint employment. In such cases, all joint employers are individually responsible for compliance.
Incorporation will not shield an individual from responsibility or liability, because certain persons are invariably construed as employers together with the entity. If an entity goes out of business or declares bankruptcy, key individuals will be held responsible for any back wages and penalties that have been assessed. Business owners, managers, and not-for-profit organization executive directors (and possibly others) will find it to be personally beneficial to ensure that their firm or organization avoids accruing a back wage liability. Likewise, managers of public agencies, especially those of state government, are vulnerable to being held as joint employers with their employing agency.
Contract Labor, "Independent Contractor"
Since 1938, 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 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.
The terms "contract labor" and "independent contractor" are commonly used in reference to workers who are perceived as being non-employees. This might be a valid conclusion only 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" for purposes of Wage and Hour Division laws. 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.
Under the Service Contract Act, the rules are even more stringent than those that apply to FLSA. If a worker is performing activities that contribute to the fulfillment of a federal service contract, that person is a "service employee" and the SCA requirements apply, irrespective of any alleged "contractual arrangement." Many "subcontractors" and owner-operators are improperly compensated, and the service contractor is accruing a back wage liability and risking debarment. See Service Contract Act.
Services are available nationally (via telephone conferences and email), including FLSA,Service Contract Act, and Davis-Bacon Act consultation, compliance assistance, DOL investigation guidance, self-audit coordination, and litigation support as a consulting expert.