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If a company hires a person to stand near a construction site and direct traffic, is the worker in business for himself? If a company can fire a consultant without warning, is the worker really an independent contractor? Is a strip club still a strip club without exotic dancers? D.C.-area workers are asking these questions—and many more—as they allege the companies they consider their employers have misclassified them as independent contractors.
When people are classified as employees, they receive an IRS W-2 form from their employers. Line one shows the employee’s wages, line two the federal income tax that’s been withheld, line four the Social Security tax, line six the Medicare tax, and so on. The 1099-MISC form that an independent contractor receives, however, usually only has one dollar amount, in box seven: nonemployee compensation.
While an employee may get a tax refund, independent contractors almost always owe: The self-employment tax alone is 15.3 percent on the first $118,500 of income. Because of this classification, independent contractors aren’t protected by D.C.’s unemployment insurance, anti-discrimination, or paid sick leave laws. Likewise, they aren’t able to collect workers’ compensation; should D.C. pass a bill granting both public and private employees 16 weeks of paid family leave, it wouldn’t apply to independent contractors.
“It’s a dollars-and-cents issue,” says Gregg Greenberg, a Silver Spring-based employment attorney. In the exotic dancing industry, for example, dancers are sometimes charged a performance fee and not paid wages, instead collecting tips from customers and pooling the money. If an employer can turn his largest overhead—payroll—into a revenue source, “how do you turn away from that business model?” Greenberg says.
Attorney Michelle Lanchester is currently representing Talayna Clements, who settled with D.C.’s Stadium Club in April 2014 for $40,000; Clements previously alleged she was misclassified, not paid wages, and “unwillingly had sex with [an employee] for fear of losing her job and her livelihood.” (Stadium Club denied the allegations.) In December 2014, she filed suit again, saying none of the scheduled monthly payments had been made. That case is still pending.
Miya Eley, another exotic dancer, filed a collective action suit against Stadium Club in September 2014 alleging independent contractor misclassification. According to the suit, the club had the “ability to discipline [dancers], fine them, fire them, and adjust each of their schedules.” The dancers, the suit alleges, were not paid the federal or D.C. minimum wage. That case is also pending.
Greenberg’s firm brought suit against the owners of two Maryland clubs for misclassification and won more than $265,000 for six dancers earlier this year.
“I think that it’s worked in the past, and they try to make it work again,” says Greenberg. “You’re going to keep on doing that until you get sued enough until you’re doing it right.”
Workers, on the other hand, often don’t know they’re being misclassified or don’t see the incentive for stepping forward. As the Washington Post reported in August, a full-time independent contractor with the D.C. Commission on the Arts and Humanities says she was fired after she sought paid maternity leave (as D.C. government employees are guaranteed) and lodged a complaint with the U.S. Department of Labor over alleged misclassification.
“In this job market, it’s tough, so people just take what they can get,” says D.C. employment lawyer Alan Lescht. “It’s a very big issue, because there’s a lot of contractors in the area.”
In fiscal year 2016, the D.C. Office of the Inspector General will conduct an audit on the award and administration of temporary service contracts. “The objectives of this engagement are to determine whether existing policies and procedures for the use and administration of temporary services contracts identify and make available best practices for use by agencies; and are in compliance with labor laws, mitigate liability risks, and assure cost-effective outcomes,” an audit plan states. In fiscal year 2016 alone, OIG states, D.C. has appropriated $500 million in local funds for “contractual services and temporary employees.”
Teresa Hinze of Community Tax Aid, a nonprofit that provides free tax assistance to low-income residents of the region, says she sees some clients who know they are being paid as independent contractors, mostly graduate students working as freelance writers or web designers. “They knew they were hired to do a project,” she says. But she also sees what she calls the “unintentionally” or “accidentally” self-employed. “They really didn’t know that this was happening,” she says.
In July of this year, the Department of Labor released an interpretation of the “economic realities” test in the Fair Labor Standards Act, the basis for determining if a worker is an employee or independent contractor. “Applying the economic realities test in view of the expansive definition of ‘employ’ under the Act, most workers are employees under the FLSA,” DOL wrote, adding that “each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee).”
The interpretation was the latest warning shot in DOL’s crackdown on misclassification, which intensified a few years ago when the department entered into information-sharing agreements with several states, including Maryland. In September, DOL issued $10 million in grants “to increase the ability of state unemployment insurance tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report the wages paid to workers at all.” D.C. received $276,310.
Legislatively, D.C. has some of the most progressive wage theft and workers’ rights laws in the country. But the issue of misclassification has only been specifically addressed once, through the Workplace Fraud Amendment Act now-Council Chairman Phil Mendelson and then-Councilmember Michael Brown introduced in 2012. The law, which went into effect in 2013 and only applies to the construction industry, upped the penalties for misclassifying employees and allowed workers “to seek up to treble damages for lost wages and benefits.”
But according to a spokesperson for the Department of Employment Services—whose Office of Wage-Hour receives and investigates complaints—no complaints were filed in fiscal year 2014 under the stipulations provided in the law. One complaint was received in fiscal year 2015, which concluded at the end of September.
“I am very concerned about independent contractor misclassification and wage theft. And I continue to be concerned that enforcement is not what it should be, not even close,” Mendelson said in a statement. “I will be working with the oversight chairman to see what we can do to improve enforcement.”
Steve Cordi, deputy chief financial officer for the Office of Tax and Revenue, says it’s impossible to spot misclassification just from looking at a person’s tax returns. (In D.C., a worker’s status doesn’t change the amount of income tax she owes.) An audit may help OTR learn about misclassification, but finding these cases through random audits is rare. Instead, most come through whistleblowers.
With the differences in federal and local law, the misclassification gray area is vast and the scope of the problem is unclear. Because “misclassification is not in and of itself a violation of the statutes that DOL enforces, there is no data on the number of enforcement cases in which we’ve found misclassification,” a DOL spokesperson says by email. Many lawsuits are settled out of court, keeping the outcome from the public, but the suits that do make it through the court process offer an insight into how judges are interpreting the FLSA.
Take a flaggers’ suit against Alexandria-based electrical utility construction company PowerComm for alleged misclassification. In certifying the flaggers’ collective action status earlier this year, a judge for the U.S. District Court for Maryland laid out, in his opinion, why the flaggers are not independent contractors: They were hired, fired, and trained by PowerComm. They filled out time sheets. They didn’t choose where and when to work. They couldn’t make business decisions that would increase their profits. They were supplied with materials, like trucks, cones, and walkie-talkies. They weren’t free to find other work.
In short, they were employees.
Correction: This story incorrectly stated that Gregg Greenberg’s firm is representing Talayna Clements. She is being represented Michelle Lanchester.
Photo by Darrow Montgomery
More from this issue:
– As D.C.’s sharing economy grows, are the workers supporting it getting the short end of the stick?
– As D.C. gets more expensive, can independent dog-walking musicians make it work?
– Has DC Health Link unleashed an entrepreneurial spirit in District residents?