Question: We are seeking clarification on hours worked for overtime pay. We have an employee who works as a “contractor” outside regular working hours, such as weekends. We are looking for guidance on when we will have to pay overtime; if allowing the employee to work as a “contractor” on the weekends will still count towards hours worked for purposes of the 40 hours workweek.
Answer: Thank you for your inquiry. If the employee is considered an independent contractor while he is performing the second job for the employer, he does not have to be paid overtime under the Fair Labor Standards Act (FLSA). However, as may be more likely, if he really is an employee performing a second job for the employer, then the hours worked should be counted for overtime purposes.
The independent contractor classification is used for nonemployee workers who typically perform specialized work that your employees do not do and are retained for a specific period of time. Since they are not considered employees of the organization, these workers are not covered by the laws for minimum wage and overtime, payroll taxes, workers’ compensation, unemployment compensation, or employment discrimination and are not eligible for any benefits.
But meeting criteria for independent contractor status is tricky because the Internal Revenue Service (IRS), the Department of Labor (DOL), states, and the courts all impose different standards for employers to satisfy.
Independent contractor status usually is determined using one of three different tests: (1) the IRS 20-factor analysis, for coverage under federal withholding requirements; (2) the “economic realities” test, used by the DOL to determine compliance with requirements of the FLSA; and (3) the common law “right to control” test, used by many courts to administer certain other statutes.
Under the IRS and common law tests, whether a person who performs work for the organization is an “employee” or an “independent contractor” primarily depends on how much control the employer has over the work relationship. In contrast, the DOL now focuses on whether the worker is in business for himself and economically independent from the employer when it applies the economic realities test.
So, as an example, if the employee works as a nonexempt office worker during the week, but does landscaping for the employer as an independent contractor on the weekend, if he provides the equipment to do the landscaping, is paid when he completes the job (as opposed to payment on an hourly basis), and sets his own work hours, then he may be more likely to be an independent contractor. But if the employer provides him with the equipment, requires him to perform the job at a particular time, and pays him by the hour, he may appear to be an employee and should be paid as such.
You also should be aware that when current nonexempt employees perform two or more jobs for your organization, classification of the second position as an independent contractor often raises a red flag for the IRS, the DOL, and state departments of revenue and labor. These agencies are interested in ensuring that taxes are properly paid and that employees are fully protected by wage and hour laws guaranteeing overtime.
Because of the complicated nature of the independent contractor criteria, you should consult with a tax expert or attorney who is familiar with them. In addition, you can request a determination from the IRS by filing Form SS-8, “Determination of Worker Status,” available online at https://www.irs.gov/pub/irs-pdf/fss8.pdf. You also can find helpful information on correctly classifying and correcting misclassification of workers from IRS Publication 15-A, “Employer’s Supplemental Tax Guide,” available online at https://www.irs.gov/publications/p15a/index.html.
If you determine that the nonexempt employee’s second job does not meet the independent contractor criteria, then you must count all hours he works in both jobs towards overtime. So, for example, if the employee works more than 40 hours in a single workweek while doing both jobs, you should pay him overtime.
Calculating overtime can be a little tricky when an employee works two or more jobs for which the employee is paid different hourly rates since overtime must be based on the employee’s “regular rate of pay.” Typically, the employee’s regular rate of pay is the weighted average of the different rates.