Independent contractor label is no protection from overtime

In 1991, Perdue Farms Inc. changed the status of the chicken catchers at its poultry plants from employees to independent contractors, which made them ineligible for overtime pay.

Clarence Heath and more than 100 other chicken catchers, who grab the birds for transport to slaughterhouses, sued Perdue under the Fair Labor Standards Act (FLSA). The court said the switch to contractor status was in name only, not in duties or responsibilities. Perdue was ordered to pay three years' worth of unpaid overtime.

The court looked at six factors. The main issue: How much control the company had over the work.

The chicken catchers worked under strict orders from Perdue that they weren't allowed to alter. Perhaps the most damning evidence was the workers' lack of capital investment. Perdue owned and maintained virtually all of the equipment. The job was unskilled labor, and most of the catchers had worked exclusively for Perdue for years.

Perdue had to pay three years' worth of back overtime, rather than two, because the court found its violation was willful. The IRS had notified Perdue in 1995 that the workers were employees. The court also noted that Perdue had ignored a 1996 Supreme Court ruling that similar Holly Farms workers were not independent contractors. (Heath v. Perdue Farms Inc., No. WMN-98-3159, D. Md., 2000)

Advice: If it works like an employee and it's paid like an employee, it's probably an employee. Don't make the mistake that many others do, simply labeling a worker an independent contractor. As Perdue found out, this mistake can lead to tremendous liability. In addition to overtime, your "independent contractors" may seek employee status to collect workers' comp, unemployment benefits or damages in a civil rights lawsuit.

Note: A letter from your accountant affirming the worker's status can help document that you made a good faith effort to comply with the law.

For a free summary of the latest IRS guidelines on independent contractors, call us at (800) 543-2055 and request Worker Classification, The IRS' New Approach.

Contractor or employee?

Courts typically look at six factors to determine the "economic reality" of whether a worker should be considered an employee or independent contractor.
Bottom line: The more control you exert over workers, the more likely they'll be considered your employees. The six factors are:
1. The employer's control over how the work is performed.
2. The opportunity for profit or loss based on the worker's managerial skill.
3. The worker's investment in equipment or material.
4. The skill required for the work.
5. The permanence of the working relationship.
6. Whether the work is integral to the employer's business.