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Overtime for 1099 Independent Contractors

A service provider can be categorized as either an employee or an independent contractor. Many employers mistake the status of their workers intentionally or due to lack of knowledge of California employment laws leading to misclassification. The California wage and hour laws do not protect these 1099 independent contractors since they work independently. Due to that, employers might misclassify workers as independent contractors to avoid paying overtime and providing other employment benefits. Orange County Workers Compensation Attorney is here to help people collect unpaid overtime compensation that was wrongfully denied after misclassification.     


Overview of Overtime for 1099 Independent Contractors

In 2008 after the economic collapse, most employers in the United States increased reliance on non-regular workers instead of full-time workers, which led to the rise of the 1099 economy.  In this economy, employees receive the 1099-MISC form, which is for independent contractors instead of W-2; hence, the source of the name 1099 employees. A study conducted in California in the year 2016 shows 12.5 million people of the United States Workforce are deemed independent contractors. Determining the status of a worker is not for the worker and employer.

According to California Labor Code 3353, an independent contractor is defined as an individual who offers or performs service at a certain amount of money for the specified outcome and under control of how services will be delivered as long as a result is accomplished.

Having independent contractors benefit employers a lot, including a lack of obligation for minimum wages, not paying overtime wages, and not filing payroll taxes. Overtime wages are an extra payment employee gets for working more than the actual hours they are supposed to work weekly or daily. Unpaid overtime, lack of benefits, and minimum wages are some of the things that do not apply to 1099 employees. 

Due to the financial benefits earned from independent contractors, employers are misclassifying workers. This situation has forced the State of California to work with the Internal Revenue Service (IRS) to analyze the classification of workers and determine their status. If found guilty of willfully misclassifying employees, employers face huge penalties, including paying the wages owed in double.


Differences between Independent Contractors and Employees

There is a significant difference between 1099 workers and employees. For independent contractors, the California employment law and the Fair Labor Standards Act does not apply to them, meaning they do not get overtime pay. Employees, on the other hand, are protected by these laws that require minimum wages and overtime pay. Economic incentives for having independent workers are significant to employers, which has led to an increase in misclassification cases. Today, however, it’s possible to recover the overtime compensation you have been denied for working extra hours.

Specific factors can help differentiate between an employee and an independent contractor. Factors that show you are an employee include:

  • The employer has the liberty and power to superintend the employee
  • An employee is paid on a weekly, monthly or hourly basis
  • The employer controls the work schedule for the employee
  • The relationship between the employee and employer is ongoing and does not end when a project is completed
  • The materials and tools used in the job are from the employer
  • The salary or pay for the employee is predetermined, and it is paid whether the business makes profits or not
  • The employee is trained by the employer formally or informally

Workers, on the other hand, will know if they are misclassified as independent contractors if there are any of these factors:

  • If the service provider has the freedom to determine the methods he or she uses to achieve the desired results
  • The service provider renders services that are not in the scope of business or activities of the entity or employer
  • The worker is paid on a project basis and not a predetermined pay
  • The contractor has the opportunity to make personal profits or loss
  • The service provider is free from the predominance of the hiring entity
  • Signing a contract stating the worker is an independent contractor


Reasons for Misclassifying Employees

The main difference between these two classes of workers is that employees receive overtime wages, while independent workers do not. Some of the reasons why employers misclassify employees as independent contractors include:

  • No filing payment taxes on payments paid to independent contractors
  • No need to comply with minimum and overtime wage rates obligations
  • No meal breaks and rest breaks
  • Employers are not liable to independent contractors for payments under social security, disability insurance, and unemployment insurance
  • Retaliation laws do not apply to 1099 workers

Every service provider in California who works for over 8 hours in a single day or 40 hours in a workweek is eligible for overtime wages. However, it doesn’t apply for independent contractors unless you were misclassified as one by your employer. If you are not sure about the class you fall into, and you are looking for a confirmation, the IRS can help. In case it is concluded you were misclassified, you are paid overtime wages owed or even double the amount.


Workers Commonly Misclassified as Independent Workers

Employers often misclassify employees to avoid meeting some of the demands set by California wage and hour laws. Some of the independent contractors that are commonly misclassified are:

  • Information technology experts
  • Welders
  • Transport or trucking industry employees
  • Service technicians and installers
  • Construction industry workers
  • Oil or Gas industry employees

Some of these hiring entities in the industries mentioned above avoid paying overtime by:

  • Spending straight time for overtime instead of expending time and half for hourly workers
  • Making use of a day rate pay scheme that helps them avoid paying premiums for overtime in a single workweek
  • Working under a piece rate


The Test That Must be Met to Prove a Service Provider is an Independent Contractor

Many facts are needed to provide evidence to establish if a worker is an independent contractor or not. IRS uses the common law test to make this determination. The analysis is based on three factors or categories:

  1. Behavioral Control Factor

To prove this factor, the IRS focuses more on whether the hiring entity has the liberty and direction to govern how the work is performed.  They will try to find out if the service provider:

  • Has employees
  • Is trained by the company
  • Decides what reporting to provide the employer
  • Judges on the working schedule and the location to work from
  • Judges on the order or manner in which services will be performed

If the worker receives instructions from the employer, uses the equipment of the employer, or performs similar tasks as other employees of the company, then they are employees and not independent contractors. Also, if a service provider is required to complete precise work, at a specific location within a specified period, then he or she is more or less an employee. Where service providers are classified by an entity as 1099 employees, but then the principal offers them training and procedures of performing the task, then the hirer is controlling how the work should be performed, which means the worker has been misclassified.

  1. Financial Control Factor

When it comes to the financial factor, evidence will be required to prove the extent to which a service provider has control over the financial aspect of the project they have been assigned by the hiring entity. IRS will focus on the following elements to prove this aspect:

  • Unreimbursed business expenses
  • Personal profit and loss for the worker
  • Use of own tools or facilities

A service provider will be more of an independent worker that an employee if they pay for their expenses, use their tools to perform tasks, the services they provide to the entity or company are also available to the general public. Also, independent employees must send invoices to the business before being paid, and they lack the chance to make a profit or loss. By observing the financial control factor, the IRS can easily find evidence to prove your status.

  1. Relationship factor

The perception of the relationship between the service provider and employer can also help provide evidence for proving the status of a worker. Under California wage and hour laws, an agreement or contract between a worker and employer stating that a worker is an independent contractor will not hold because a contract is not considered when determining the status of a worker. On the other hand, an agreement signed by both parties stating their relationship will have much weight to the IRS. If a worker gets employee benefits from the employer, such as sick pay or pension, it is an indicator of a relationship existing between the two.

In 2018 however, the California Supreme Court made a landmark ruling in the case of Dynamex Operations West Inc. vs. the Supreme Court of Los Angeles. In the decision, the court adopted an ABC test for establishing employees and independent contractors. The test is now used by all California courts, and it deems all service providers hired by an entity as employees unless the employer proves the elements listed below:

  • (A) The service provider is at liberty from any degree of command or instructions from the hirer in terms of how the work or project should be performed.
  • (B) The worker renders services for tasks outside the scope of the hirer’s accustomed line of business.
  • (C) The service provider is conventionally involved in a separately set dealing, job, or commerce similar to that of the hirer. The employer or hirer cannot claim a service provider is a 1099 employee because they allow employees to take part in independent businesses of similar nature to that of their entity.

Without satisfying any of these elements, the court will deem any worker as an employee. The employee is therefore entitled to overtime and things like meals and rest breaks. 

For instance, James has created a mobile App but still wants to develop a web app for users who prefer using the web. Because he has no skills for developing a web App, he decides to hire Peter, who is a web app developer, to do the work.

After Peter has completed the project, James decides to hire him to maintain the web App system but on monthly payment. Peter does all the work but works from his own office so that he can serve his other clients. Peter is, therefore, not an employee of James.

However, if Peter receives many clients such that the workload is too much and he decides to hire Jane to help with some of the work but pays her on an hourly basis depending on the amount of work, then Jane is an employee. If Jane works from Peter’s office, signed an independent contractor agreement, and Peter gives control and direction on how the work is to be done, then Jane is an employee of Peter and not an independent worker. It is only valid when Peter cannot prove all the elements of the ABC test. In this case, Jane is entitled to overtime pay.

A decision by the Labor Commissioner might defer with that of the Employment Development Department on the same claim. One might conclude that a worker is an employee, and the other one might establish he or she is not. The reason being there is no set definition of independent contractors. Also, the decisions by the various state agencies might differ if a different law is applied or when a different test is used in the status determination.


California Overtime Laws 

According to this law, only nonexempt employees are eligible to overtime pay but under the following conditions:

  • If the employee works for over 8 hours within twenty-four hours
  • In case the worker performs his or her more than forty hours in a week
  • If the service provider works for over six days in a single workweek

The above employees get paid time and a half for the excess hours. On the other hand, others get a double-time overtime pay if they work:

  • Over 12 hours in a day
  • More than 8 hours on the 7th day of the week

As long as the hiring entity allows you to perform the extra work, you are entitled to overtime pay unless:

  • You are 1099 workers
  • You are an exempt worker according to California wage and hour law
  • You are subject to an alternative workweek schedule

Under the California wage and hour law, California courts authorize overtime pay for extra work done even without the approval of the employer. However, before performing unauthorized overtime, you should know the overtime policies of the employer to avoid being terminated or violating the entity’s policies by working overtime without approval, although they still owe you for working overtime.

In case an employer owes you money, you can bring an overtime lawsuit against them so that you can collect the wages. Filing an overtime claim is not a walk in the park, which is why you need an Orange County Workers Compensation Attorney.


The Process of Filing an Overtime Claim

The process begins with filing a claim with the Labor Commissioner in your locality. After that, the claim file is forwarded to the Deputy Labor Commissioner, who decides the validity of the case. If the claim is invalid, it will be dismissed, but if it is valid, a conference or hearing will be set. You will be informed about the decision made by the Deputy Labor Commissioner through email.

In case of a conference, you and your principal or hirer will meet so that you can try and resolve the issue outside the civil court.  However, if the item is not resolved, the case will proceed to the hearing. You and your hirer will testify under oath but in the absence of a jury. The hearing is presided by a Deputy Labor Commissioner but not the one handling your case.

After the hearing, the Labor Commissioners serve the parties involved with an order, decision, or award. If one of those involved is not satisfied with the decision, he or she can move to appeal the case in a civil court. A date for a trial is then set by the court. In the trial, you and the employer must provide witnesses and evidence to support your claim or for defense. An Orange County Workers Compensation Attorney is needed in a prosecution for representation. If you cannot afford an attorney, DLSE will represent you in court.


Ways an Employer Can Violate California Wage and Hour Laws

Employees might bring a claim against the employer if:

  • They are misclassified as exempt employees or independent contractors to avoid paying them overtime wages
  • The employer fails to adhere to the California Overtime Laws
  • The employer requires employees to work during rest or meal breaks

In the event you feel your employer has violated these laws, the Statute of Limitations provides up to three years from the date of violation for the employee to file a lawsuit.


Options for Employees Owed Overtime Wages

The California employment laws give employees the right to bring wage and hour lawsuits against employers for unpaid overtime wages. If the cases succeed:

  • The employee can collect the remainder of the unpaid wages owed by the principal
  • The interest amount that has accumulated on the unpaid wages
  • Litigation costs and attorney fees

In the event, more than one employee is claiming unpaid work off clock wages from the same employer; the employees can bring a class action employment lawsuit against that employer.


Penalties for Misclassifying Service Providers as Independent Contractors

If a principal or hirer is found defying of California Labor Code 226.8, the penalties are:

  • Five thousand dollars ($5000) to fifteen thousand dollars ($15,000) fine for every single violation of the law
  • Posting a notice of a breach in the entity’s website or a prominent location easily accessible to employees and the public for one year
  • Fines of between ten thousand dollars to twenty-five thousand dollars for employers with a pattern for violating the law

The Labor Code Sec. 226.8 is enforced by the Labor Commissioner of California Labor and Workforce Development Agency or California’s Private Attorney General’s Act.


Other Employees that are Related to Independent Contractors

You might think that only 1099 independent contractors are not protected by the California wage and hour law, but, that is not true. Some workers are closely related to 1099 employees. They include:

  1. Exempt employees

These are workers that are exempted from overtime pay, meal, and rest breaks. These employees mostly perform while-collar jobs. White-collar exempt workers can, however, qualify for overtime pay but only if:

  • They devote half of their time acting executive or administrative activities
  • They customarily and often take part in independent decision making
  • They earn a minimum salary of twice the minimum wage ($45,760 per annum) set by the state for a full-time employee

An example of an exempt employee who should earn overtime pay is a supermarket manager who is involved in recruiting employees, making purchase decisions, or takes part in administrative decisions but earns $40,000 a year. The fee is below the state minimum wage of $45,760. Such an exempt employee is therefore owed by the employer for overtime wages.

  1. Alternative workweek schedule

It refers to a team of workers who enter into a contract with the employer to work for up to ten hours without overtime pay. California overtime laws will also do not apply to service providers who have agreed with the employer to work under an alternative workweek schedule. Such employees have exceptions also and can claim unpaid overtime wages.  These valid exceptions include:

  • If employees work more than the work hours authorized by the alternative workweek schedule
  • If they work over 40 hours in a single workweek
  • If the alternative workweek schedule was for unionized employees and was founded through collective bargaining


Find an Orange County Overtime Wage Claim Attorney near Me

Everyone deserves wages for excess hours worked. Employers, however, confuse or take advantage of service providers who are not aware of their employment status to deny them overtime wages. If you want to file a claim for unpaid overtime for 1099 independent contractors, contact us at Orange County Workers Compensation Attorney through 949-423-3212 for a consultation and guidance on claiming overtime wages.


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