Contractors around the nation have been reporting a surge in audits by the U.S. Department of Labor (DOL) and state labor agencies. As cash-strapped states seek additional revenue, there’s a heightened focus on the use of independent contractor or “1099” labor within the construction and remodeling industries and a growing awareness at the state and federal levels that many contractors have failed to structure their 1099 labor relationships with regard to applicable wage and hour laws.

As if a spike in wage and hour audits was not bad enough for the industry, the DOL also recently signed a memorandum of understanding with the Internal Revenue Service that will enable both agencies to share information and coordinate law enforcement efforts to crack down on perceived abuses of 1099 workers made by independent contractors. With this agreement in place, cross-agency audit risks are taken to new heights.

At the federal level, wage and hour laws overseen by the DOL are contained within the Fair Labor Standards Act (FLSA). Each state also has some version of the FLSA. In FLSA audits of a contractor, the prime areas of attack are usually the handling of minimum wage and overtime payments for sales representatives and installers. We also see attacks in regard to canvassers, telemarketers, and drivers on a regular basis.

THE RULES

Minimum wage and overtime rules do not apply to independent contractors, so the first issue when facing such an audit is to ensure that 1099 workers are truly structured as independent contractors. This is complicated because what will or will not pass an independent contractor test varies from state to state as well as from agency to agency. (For more specifics visit www.napac.net.)

For sales representatives treated as either W-2 employees or statutory non-employees (under Internal Revenue Code §3508), minimum wage is generally not much of a concern other than during the time they spend in training. If a sales rep isn’t meeting minimum wage requirements, he or she tends not to stick around or gets fired.

For overtime, there is an often overlooked exemption under the FLSA, and many state labor laws for “outside sales representatives.” To qualify for this exemption: the employee’s primary duty must be making sales (as defined in the FLSA) or obtaining contracts or orders for services; and the employee must be customarily and regularly engaged away from the employer’s place or places of business. That often gives us a “get out of jail free” pass for sales representatives claiming overtime.

For installers, the real risk is claimed overtime. This is because the FLSA and most state labor laws require that employees be paid one and a half times their hourly wage for every hour worked over 40 hours per week. It doesn’t matter if the installer is being paid commission, piece rate, hourly, or a hybrid version of these; the result is still the same: The auditor usually looks at a two-week time period and the total amount of compensation earned by the installer during that period. To get the hourly wage, that number is divided by the number of hours the installer worked.

Based on that hourly wage, the auditor calculates the overtime rate that the installer should have been paid for each hour that he or she worked over 40 hours in a given week.

Plan Ahead

The contractor’s goal should be to:

  • review all worker relationships to find out wage and hour exposure for independent contractors and employees;
  • make sure that all independent contractors are under state-specific protocols, and, if not, consider converting these workers into employees;
  • and take steps to cut off potential employee claims of wage and hour violations that can lead to class actions or audits. Restructure relationships if necessary and put safeguards in place to defend existing relationships.

—D.S. Berenson is the Washington, D.C., managing partner of Berenson LLP, a national law firm specializing in the home improvement industry. homeimprovementlaw.com; 703.759.1055; info@BerensonLLP.com

This article is for informational purposes only and shouldn’t be construed as legal advice.