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Article Summary

The U.S. Department of Labor has declared 4.2 million workers to be newly eligible for overtime pay. The new regulation is positive news for employees — but some companies may try to avoid the extra cost by misclassifying their workers as independent contractors. Here's what employees should know.

This article by TELG principal & general counsel Nicholas Woodfield was published by The Employment Law Group, P.C. on May 18, 2016.

New Overtime Rule: Could It Push You Into the ‘1099 Economy’?

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By Nicholas W. Woodfield

The U.S. Department of Labor just declared 4.2 million workers to be newly eligible for overtime pay — and employers are scrambling to avoid the extra cost.

One likely result: Yet another expansion of the so-called “1099 economy,” as more companies misclassify their workers as independent contractors in order to skirt fair-labor rules.

It’s a shame, because the new regulation — which takes effect on December 1 — is designed to increase workplace fairness. Until now, companies could avoid paying overtime to employees who earn as little as $23,660 a year, roughly the poverty level for a family of four, even if those employees worked long hours.

Companies have dodged overtime rules by switching hourly workers into “exempt” salaried positions, adding fig-leaf managerial duties in order to allow long hours without extra pay. Being called an assistant manager sounds nice, but it often translated to an hourly pay cut. Such ploys will be harder under the new rule, which requires overtime for anyone earning up to $47,476 — and increases this threshold every three years so that it covers up to 40% of full-time salaried workers, depending on the region of the country.

As a result, many employers may opt for a trendier sort of chicanery: Reclassifying employees as independent contractors who don’t get overtime, and who will lose other benefits and protections besides. If you’re a salaried employee earning less than $47,476, you are vulnerable to this maneuver — especially if your job involves lots of flexibility or a skilled trade.

It’s the latest move toward the 1099 economy — embodied by companies like Uber — in which employers disclaim all obligations to the workers on whom their business relies.

Here’s a three-step guide for surviving the coming rule change.

1. KNOW THE SIGNS

If you are salaried (not paid hourly) and earn between $23,660 and $47,476, you’re likely see some change before the end of 2016, no matter what. Your boss may ask you to start tracking your work hours, for instance, so that overtime can be paid properly — or maybe forbidden — and that’s likely OK, as long as it’s not accompanied by a drop in your regular pay or benefits.

You might even get a salary raise to $47,476, just so that you can remain exempt from overtime rules. That’s probably OK, too, depending on your job duties.

However, if your manager starts praising the freedom of being an independent contractor, or tells you that you’re getting a raise but that your pay will no longer be reported on a W-2, watch out.

As the name implies, independent contractors (also known as 1099 workers, for the tax form they get instead of a W-2) must be legally separated from the company for which they perform work. This means no company-paid benefits, no tax withholding, no company payment of Social Security taxes — and no right to overtime.

Even if your company says it’ll pay you enough to replicate your old pre-tax package, including benefits, you’ll still lose out as a 1099 worker:

  • Handling taxes and benefits yourself is a huge hassle, and it’s easy to make mistakes that will come back to bite you.
  • You’ll forfeit the right to overtime — which is exactly what the Labor Department is trying to grant you.

In short, don’t assume that the 1099 discussion is just legal mumbo jumbo that won’t affect your life. It could make a very big difference.

2. KNOW THE RULES

Under the law, some employees can’t credibly be changed into independent contractors. Let’s say you serve customers in a retail store, for instance. Your employer probably controls most aspects of your work — your location, your hours, your dress, how you greet people, and so on. In such a situation, it’s likely illegal to switch you to 1099 status.

Other jobs fall into a grayer area. If you work from home without much oversight, your employer might argue that you’re an independent contractor. Or if you’re a skilled tradesperson who provides many of your own tools — an auto mechanic, for instance, or a carpenter — your employer could say you’re “independent” even though the company dictates your workplace and hours.

There’s no exact formula for 1099 status: It requires weighing the circumstances and coming to a balanced conclusion. Just because your boss says you’re an independent contractor, that doesn’t make it true — especially if your employer is acting mostly to avoid paying overtime.

3. KNOW YOUR RIGHTS

If your boss wants to reclassify you as a 1099 worker but you think the change is dubious, you have the right to complain — and under the Fair Labor Standards Act, it’s unlawful for anyone to punish you for speaking up. This protection applies regardless of company size, and is robustly enforced by the Labor Department.

Furthermore, you’re protected even if your complaint doesn’t turn out to be valid — you simply must be acting in good faith. Your complaint can be written or oral, and most courts will uphold your rights whether you whether you complain to the Labor Department or just to your boss.

If you’re lucky, the new overtime rule will have only positive effects: You’ll finally be paid fairly for working beyond 40 hours a week. If your employer tries to weasel out, however, you don’t need to join the 1099 economy without a fight.

Nicholas W. Woodfield is principal and general counsel of The Employment Law Group, P.C. He is president of the Virginia Employment Lawyers Association.

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