Earlier this month, the U.S. Department of Labor’s (DOL’s) Wage and Hour Division (WHD) announced it is seeking claimants for a case settlement of over $5.6 million for illegal employee misclassification. The DOL is seeking out over 1,300 affected current and former employees as claimants in the settlement. In October 2022, the DOL proposed an independent contractor rule that would apply a six-factor economic reality test to determining worker classification. Upon initial review and public comment, a final rule has been delayed numerous times. In June 2023, however, the DOL announced that its independent contractor final rule would be ready for publication in October 2023.
Illegal Employee Misclassification Under the FLSA
The Fair Labor Standards Act (FLSA) is the country’s primary federal wage and hour law and one of five main employment laws all businesses must know. As such, the FLSA provides a minimum wage and overtime protections for virtually all U.S. workers. Generally, the FLSA requires private sector and government employers to pay a federal minimum wage of not less than $7.25 an hour and an overtime pay rate of one and one-half the regular pay rate during hours worked over 40 a week.
However, some employers illegally and inaccurately classify their workers as independent contractors to avoid paying required overtime. What’s more, this illegal employee misclassification denies workers benefits and protections to which they are legally entitled. It’s worth noting that misclassifying employees is illegal even if the employee agrees to the erroneous classification. Independent contractors differ from employees in that they:
- control their own workload or run their own business,
- provide their own materials,
- work with multiple clients, and
- deal with temporary client relationships.
Overview of the Illegal Employee Misclassification Case
According to WHD investigators, the Arizona-based auto parts distributor and their delivery company engaged in illegal employee misclassification from April 2012 through March 2020. By misclassifying employees as independent contractors, the company violated the FLSA in the following ways:
- failing to pay employees the required minimum wage;
- paying straight-time rates for all hours worked;
- not paying the overtime rate of time-and-one-half for hours worked over 40 in a workweek; and
- failing to maintain required timekeeping records.
Additionally, the company required employees to use their personal vehicles for deliveries without reimbursing them.
Judgment in the Case
The DOL brought the case to the U.S. District Court for the District of Arizona (the District Court). In DOL v. Arizona Logistics Incorporated, et al., the District Court entered its consent judgment requiring the company to pay $2.8 million in back wages and an equal amount in liquidated damages to affected employees. Additionally, the judgment requires the company and its owner to pay $150,000 in civil money penalties.