Independent Contractor Compliance Blog - by Collabrus™

A reported recent ruling in a New York federal district court held that payments made to a worker, who was both an independent contractor and an employee with the same business, could not be combined to avoid paying overtime compensation under the FLSA.

She was an employee but also provided a separate service in her established independent business and her employer happened to be one of her clients

The problem was the company failed to pay her for her overtime work as an employee. The company argued that her combined earnings as an employee and an independent contractor (over $100,000 in a year) totaled enough to more than cover all overtime requirements and placed her in the “highly compensated” category of worker, making her an “exempt employee.”  Therefore, she was not entitled to overtime.

The court disagreed, ruling that earnings as an independent contractor do not contribute to overtime wage requirements as an employee under FLSA.

Caution:  This ruling sends a mixed message

It confirms that it is legally possible for an employee to receive both a W-2 and a 1099 from the same business in the same year.

It also confirms employing the same person as an IC and an employee presents a special set of dangers.

It is possible

It is legally possible but it is very unusual for an employee, who receives a W-2, to also correctly receive a 1099 from the same employer.  To qualify for an IC status he must meet the common law test as an IC, which includes but not limited to, such things as:

• The individual has a legitimate independent business (including other clients not connected to the employer)
• The work as an IC is not the identical, or even similar, to what he does as an employee.
• He is free of direction and control while performing this service.

For example, a software engineer also does work as an independent sign painter on weekends.  It’s his artistic expression.  He advertises and has dozens of other clients and gets calls regularly for jobs.  The software company he works for as an employee-engineer during the week hires him to paint some signs for a special occasion-a one time job.  He quotes a flat price for the work (say $2,000), which is not connected to the pay rate he receives as an engineer during the week.  He does the work on the weekend, at his own time, and using his own materials and supplies at his own expense.  He is paid for a completed job, not by the hour and not for any rework.  Nobody supervises his work-the company is only interested in the final product as agreed to.  In this case it would be correct for the employee-IC to receive a 1099 MISC for the $2,000 and a W-2 for his regular salary as an employee.

Doing so presents a special set of dangers

The IRS, and other enforcement agencies, usually looks at a 1099 and W-2 in the same year as a red flag, raising your probability of being audited and a tax assessment.

Also, since the work as an IC is a completely separate event from the work as an employee, do not mix the two works in any way including minimum wage, overtime, fringe benefits, termination, and especially the right to direct and control the work. 

One final caution

If you do have an employee who is also providing an IC service, be sure to clearly document and save your evidence.  You will need to prove you are right.