Not all workers are eligible for overtime compensation. There must be an employment relationship between the worker and the potential employer for the Fair Labor Standard Act's overtime provisions to apply. Independent contractors, as opposed to employees, lack the requisite employment relationship with the potential employer. They're ineligible for overtime regardless of what they do or how much they work in a given week.
The Fair Labor Standards Act defines “employ” as including to “suffer or permit to work.” That represents the broadest definition of employment under the law because it covers work that the employer directs or allows to take place. Workers who are economically dependent on the business of the employer, regardless of skill level, are considered to be employees, and most workers are employees. Conversely, independent contractors are workers with economic independence who are in business for themselves.
Courts will usually evaluate several factors in determining whether a worker's an "employee" or an "independent contractor":
- The extent to which the work performed is an integral part of the employer’s business: If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer and less likely that the worker is in business for himself or herself. Work is integral to the employer’s business if it is a part of its production process or if it is a service that the employer is in business to provide.
- Whether the worker’s managerial skills affect his or her opportunity for profit and loss: This factor has two components. First, whether the worker has managerial responsibilities. Second, does the worker use those managerial skills to independently hire other workers and purchase equipment. If both factors are present, then the worker may be an independent contractor because the worker's not as economically dependent on the employer.
- The relative investments in facilities and equipment by the worker and the employer: This is related to the previous factor. The worker must make some investment compared to the employer’s investment (and bear some risk for a loss) in order for there to be an indication that the workers is an independent contractor in business for himself or herself. If a worker’s business investment compares favorably enough to the employer’s that they appear to be sharing risk of loss, this factor indicates that the worker may be an independent contractor.
- The worker’s skill and initiative: To indicate possible independent contractor status, the worker’s skills should demonstrate that he or she exercises independent business judgment. It is whether these workers take initiative to operate as independent businesses, as opposed to being economically dependent, that suggests independent contractor status.
- The permanency of the worker’s relationship with the employer: Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee, as opposed to an independent contractor. But a worker’s lack of a permanent relationship with the employer does not necessarily suggest independent contractor status because the impermanent relationship may be due to industry-specific factors, or the fact that an employer routinely uses staffing agencies.
- The nature and degree of control by the employer: Analysis of this factor includes who sets pay amounts and work hours and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers. An independent contractor
generally works free from control by the employer.
The United States Supreme Court has ruled that there is no single rule or test for determining whether an individual is an employee or independent contractor for purposes of the FLSA. The Court has held that the totality of the working relationship is determinative, meaning that all facts relevant to the relationship between the worker and the employer must be considered. While the factors considered can vary, and while no one set of factors is exclusive, the above factors are generally considered when determining whether an employment relationship exists under the FLSA.
In recent years, the United States Department of Labor has made the issue of independent contractors versus employees a focal point of its investigations. The Department has stated that "[t[he misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy. Misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds."
As part of the Department's misclassification initiative, on July 15, 2015 it issued an Administrator's Interpretation regarding the difference between independent contractors and employees. The Administrator's conclusion was that "most workers are employees under the FLSA’s broad definitions." The Department's efforts go beyond Federal overtime law -- The Department's also working with the IRS and many states to combat employee misclassification and to ensure that workers get the wages, benefits, and protections to which they are entitled under all the federal and state laws that are only applicable if there's an employment relationship between the worker and the potential employer.