Employee Misclassifications: What You Should Know

On October 19, 2016, we posted a blog about the Chicago Minimum Wage law which became effective July 1, 2015, with an hourly wage of $10.00, increased to $10.50 July 1, 2016, and continues to increase incrementally each year into the future. The Chicago law also imposes very substantial penalties on employers who violate it, including its adoption of the federal Fair Labor Standards Act (FLSA), which requires payment of time-and-a-half for all hours worked over 40 in a week. That blog posting is certainly worth reading for Chicago employers and employees who might have missed it the first time around.

While the Chicago law is really tough, the Illinois Wage Payment And Collection Act (IWPCA) and the FLSA. If an employee has been underpaid he doesn’t have to choose among these laws, she may use all of them that are applicable cumulatively. So employees in Chicago can sue under all three laws, employees in Illinois but not Chicago can sue under both the IWPCA and the FLSA, and employees outside Illinois can sue under the FLSA, as well as laws that may be applicable in their own state, or even their own city.

Sometimes these laws may come into play because employers choose to knowingly underpay their employees and hope no one will notice, or at least no one will bring a lawsuit—and sometimes they even get away with it.

But there are other times when an employer violates the law because he simply is not aware or is not getting good (or any) advice from a lawyer knowledgeable in the field. The most common of these mistakes is failing to properly classify an employee as being entitled to hourly wages instead of a fixed salary. Sometimes an employee is misclassified as “exempt” from the wage laws, and sometimes an employee is treated as an “independent contractor”, that is, not an employee at all but rather a separate business selling goods or services to the employer. Regardless of why the error occurs it means substantial losses to the employee who does not pursue her legal rights or substantial losses to the employer who gets caught.

Employee vs. Independent Contractor

Perhaps the most serious mistake an employer can make is misclassifying his employees as independent contractors. An independent contractor is treated as a separate business and receives none of the benefits of the wage laws. (Misclassifying an employee as an independent contractor can also have serious income tax ramifications, but we won’t go into those here.) Sometimes employers and employees think they can simply have an agreement, even a written contract, that the employee will be treated as an independent contractor. But whether a person is an employee or an independent contractor is determined on specific factors in their relationship, set by law, not on any private agreement.  The primary factors distinguishing an employee from an independent contractor are the person works for the employer. Does the employer tell her what hours to work, how to do her job, require her to work on the employer’s premises or use tools and equipment provided by the employer? The determination is often a balancing act, dependent on the overall relationship and not any single one or two of the factors. If in doubt, you should certainly consult an employment attorney.

Exempt (salaried) vs. Non-Exempt (hourly) Employee

Another type of employee misclassification is when an employee is labeled as exempt, when they should be classified as a non-exempt employee. Generally, exempt employees are part of management, or at least have a certain amount of management activities as part of their job. Do they supervise other employees? Do they take part in evaluating employees, make decisions in pay rate changes, hiring or firing?

Non-management employees may also be exempt if they are “professionals”, qualified to do their job only by having specialized education or licensure, like a nurse, an architect or a Certified Public Accountant (but not a bookkeeper). Again, whether an employee is considered exempt is not a matter of agreement between employee and employer. It is an objective determination defined by law. Sometimes there may be a gray area where it is not clear whether an employee is exempt or non-exempt. If there is a question it is often a good idea to consult a qualified employment lawyer. However, even if the objective determination would classify the employee as exempt the employee and employer can still agree that the employee will be paid an hourly wage and thereby become subject to the minimum wage and overtime laws.

Sometimes there is no doubt that an employee is non-exempt and entitled to be paid a wage for all hours worked and time-and-a-half for hours worked over 40 in a week, but instead of paying time-and-a-half for overtime, the employer choses to just pay his employees straight time for overtime. On that issue there can be no dispute. It is a flat out no-no!

Finally, even if an employee is clearly non-exempt and usually paid at least the minimum wage for hours worked and time-and-a-half for hours worked over 40 in a week, there can be a major dispute about what constitutes work. If an employee is given a 30-minute lunch break the employer can say this is not compensable work and not subject to payment at all. But, what if the employee is required to eat at her desk and be on standby to frequently answer phone calls? What about time spent getting ready for work like gathering equipment and supplies to do the job? Sometimes these situations are pretty clear, but sometimes they fall into a gray area and, again, the advice of a qualified employment attorney may be invaluable.

If you feel that you may be a victim of employment misclassification and are missing out on important wages, or if you are an employer who wants to be certain you are following all the rules but are just unsure in some circumstances, contact the employment attorneys at Maduff & Maduff today.