When your employer doesn’t consider you an employee

Do you have a job? It seems like a simple question, but millions of Americans aren’t quite sure one way or another. The growth of nontraditional employment means more and more people are doing what can be recognized as work without knowing their exact employment status. Between independent contracts and internships, firms are increasingly reliant on marginally attached workers, for whom it is hard to say what labor regulations apply.

A newly reproposed law seeks to fix this ambiguity by forcing businesses to clarify — in writing — whether their workers are employed or not. Introduced by Rep. Joe Courtney, D-Conn., in May, the Payroll Fraud Prevention Act of 2014 (a reinvigorated attempt at a bill that stalled last year) would reform the Fair Labor Standards Act (FLSA) of 1938 to reduce employee misclassification. If the bill becomes law, it will define nonemployees — people engaged for labor or services who are not employees — and require firms to issue notices informing workers of their official classification, their rights under the law and options for seeking remedy if they think they have been misclassified. The act would go a long way to leveling the informational asymmetry that plagues the labor market.

The FLSA is perhaps the centerpiece of 20th century U.S. labor regulation. The law establishes a minimum wage, the right to overtime and the abolition of child labor. It also includes a lot of loopholes. Many employees are statutorily exempted from the FLSA — from babysitters to truck drivers to executives — but the ultimate way to dodge employment law is not to hire employees at all. Nonstandard work arrangements such as part-time or seasonal labor, self-employment and independent contracting are called contingent because the workers serve at the will of their (non)employer. Firms don’t pay taxes for Social Security and unemployment insurance for independent contractors, so misclassification can cost the government a fortune in unpaid taxes.

Some aspects of contingent work are appealing to laborers. Under what’s called the common law test (used by the IRS to figure out payroll taxes), a worker is an employee if the employer has the right to control the work process rather than just the product. As someone who likes working from home, I’d rather not be an employee under the common law test if I can avoid it. But the Department of Labor uses a different measure for FLSA enforcement: the ominous-sounding economic realities test. Under this test, if the individual is economically dependent on a business for continued employment, he or she is an employee. Employers capitalize on the confusion between these two tests and mislead workers into believing they’re not entitled to overtime or the minimum wage. The use of independent contractors has paved the way for blatantly illegal unpaid internships, which function more or less the same way but without a regular paycheck.

University of North Carolina labor sociologist Arne L. Kalleberg has been tracking the increase in contingent labor in the United States, and he has found that although some wealthier independent contractors are better off with their arrangements, it hurts most workers, both in and outside traditional jobs. He identifies some of their disadvantages in the 2013 edition of his book “Good Jobs, Bad Jobs,” including difficulty in organizing, weak employment protections and downward pressure on wages in general. But what's bad for workers is good for bosses; compared with independent contractors, employees are inefficient. Why pay for any more than the exact amount of work you need?

Given the inherent potential for misuse as well as the leverage the current economy gives to employers over laborers, it should not be a surprise that the number of FLSA complaints has risen along with the use of nonstandard employment agreements. In 1998 there were a measly 1,562 FLSA cases, but by 2013 the number was up to 7,764 — an increase of almost 400 percent. The wage and hours division of the Department of Labor is responsible for investigating these complaints, and it has its hands full. While the number of complaints has shot up, the division’s budget hasn’t risen as quickly, going from $121 million in 1998 to $268 million in 2013; this means investigators had an average of $77,465 per case in 1998 and only $34,518 per case in 2013. But even with half as much funding per investigation, wage and hours won U.S. workers $1.55 billion in back wages from 2007 to 2012 — more than the division’s total budget for those six years.

The Payroll Fraud Prevention Act is a good idea, and I hope it passes. Forcing companies to disclose to employees and nonemployees alike their status and rights under the law would make bosses think twice about misclassifying workers. It would go a long way toward ending unpaid internships. But we can do even better, by increasing the budget for the wage and hours division so that its investigators don’t get overwhelmed by notices, especially since the proposed law requires employers to provide contact information for the local Department of Labor branch. The division is worth the money: Every dollar that goes into the wages and hours division returns to U.S. workers as back pay. Given that labor’s share of GDP is at its lowest level since the Federal Reserve started keeping track, it’s time for America to invest in getting workers what they’re owed.