Public Employment Law Bulletin #42

Government employers sometimes turn to independent contractors (occasionally referred to as “contract employees”) to perform work traditionally done by regular employees. Below are some of the advantages that employers see for doing so.

• No overtime pay. Independent contractors are not subject to the Fair Labor Standards Act (hereinafter FLSA) overtime requirements.
• No benefits. Independent contractors are generally ineligible for employer-provided benefits plans such as health insurance and retirement benefits provided by membership in the Local Governmental Employees’ Retirement System (hereinafter LGERS) or the Teachers’ and State Employees’ Retirement System (hereinafter TSERS).
• No income tax withholding or FICA contributions. Independent contractors are not subject to subject to income-tax or FICA (which funds the social security and Medicare programs) withholding. Employers are not responsible for making FICA contributions for independent contractors.
• No workers’ compensation. Independent contractors are not covered by the North Carolina Workers’ Compensation Act.

The difference between compensation and benefits provided to an employee and those offered to an independent contractor doing the same work can be substantial.

But classifying a worker as an independent contractor also involves significant risk. There are legal standards for determining whether a worker may be treated as an independent contractor or must be classified as an employee. Which legal standard to apply depends on context.

• For FLSA and overtime purposes, the United States Department of Labor (hereinafter DOL) applies an “economic-reality test,” newly incorporated into its FLSA regulations.
• For federal tax-reporting purposes, the Internal Revenue Service (IRS) uses a common-law test of twenty factors, grouped into three major themes.
• For determining worker classification under North Carolina law, courts use a common-law test similar to the IRS test.

Misclassifying an employee as an independent contractor under any one of these tests can result in significant penalties. This Public Employment Law Bulletin examines the DOL’s 2024 independent contractor regulations, the IRS’s twenty-factor test, and the North Carolina common-law test, as well as a misclassified worker’s rights to health insurance benefits. It concludes with a consideration of the potential penalties for worker misclassification.