Overtime Pay to Employee/Independent Contractor

By | January 21st, 2013 | General

Classifying an individual as an employee or an independent contractor is important has a number of significant implications – it can impact the employer’s obligation to withhold and pay taxes, the individual’s eligibility for benefits, and whether the individual is entitled to the protections of the Fair Labor Standard Act with respect to payment of overtime. What is already a very complicated analysis becomes even more complicated when the individual performs more than one role for the same organization.

The US Court of Appeals for the 10th Circuit addressed in Barlow v. C.R. England, Inc. the sticky situation of an employee who also began performing (unrelated) services for his employer that were previously provided by an independent contractor. Mr. Barlow worked security for his employer and wanted more hours. Although that request was not approved, the parties discussed Mr. Barlow working as an independent contractor to provide janitorial services to replace the previous company. Mr. Barlow formed a Limited Liability Company and was awarded the contract for janitorial services. Mr. Barlow personally performed the janitorial services on behalf of his company. After his working relationship with his employer deteriorated and his janitorial services contract was terminated, Mr. Barlow sued his employer for unpaid overtime arising out of his performance of the janitorial services. Applying the “economic reality test”, the Court ruled that he was not entitled to receive overtime payment for services rendered as an independent contractor. Key factors in the court’s decision were that Mr. Barlow and his partner created the janitorial business company which was not economically dependent on his employer’s company. Mr. Barlow and/or his partner had the freedom to perform services for other companies. The LLC kept a separate bank account, filed a corporate tax return and had the freedom to decide how to accomplish the tasks assigned. It is important to note that in other cases, courts have found that merely incorporating as a separate business is not enough to justify the conclusion that an individual is an independent contractor; all relevant circumstances will be considered.

Employers who have “dual” relationships with employees should proceed with extreme caution. Any independent contractor agreement should be carefully worded to avoid any overlap in duties. The penalties for misclassification can be crippling. For assistance with this or any other wage and hour or employment related issue, contact the Employers Legal Resource Center at 405-702-9797.

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