Connecticut Overtime Pay: The Underground Economy

HELPLINE

Any discussion about Connecticut overtime pay starts with a discussion of the underground economy, in which workers are paid off the books or incorrectly paid as independent contractors.

Why would an employer participate in the underground economy? Two words: it’s cheaper.

It’s expensive to have an employee. Businesses know this all too well. In addition to the actual cost of an employee’s wages, the company must pay the employer portion of the Federal Insurance Contributions Act (FICA) – also known as Social Security taxes. That’s 6.2 percent of the employee’s pay before withholding (the employee pays an equal amount). Next, there’s the hospital insurance tax (Medicare). That’s another 1.45 percent (again, the employee pays an equal amount).

In addition to FICA and Medicare taxes, employers are required to pay for state unemployment insurance and workers compensation.

If the employer offers employee benefits, that’s another cost. According to the U.S. Bureau of Labor Statistics (BLS), in 2014, employers in the private industry paid an average of 8.4 percent of compensation for paid leave (vacation, sick leave, holiday leave, and personal leave) for management and professional employees. The cost of leave for those in service occupations averaged 3.9 percent of total compensation. Other potential (and costly) employee benefits include life insurance, health insurance, disability insurance, and retirement.

Finally, there are the costs associated with what BLS calls “supplemental pay.” This is overtime pay, shift differentials, and bonuses.

In contrast, consider the employer expense for an independent contractor. Sometimes called a 1099 contractor because they are issued form 1099s in lieu of W-2 forms, an independent contractor costs the employer only the contractor’s rate of pay. That’s right. No FICA and no Medicare (the 1099 independent contractor pays both the employee’s and the employers part – a total of 15.3 percent). No workers comp or unemployment insurance. No vacation time, sick time, or holiday pay. No insurance or retirement benefits. And, no overtime pay.

If an employer can get away with paying someone as an independent contractor, why wouldn’t they? Similarly, if an employer can pay someone cash and not record it at all, that saves another level of paperwork and tax reporting.

This underground economy plays a significant role in Connecticut, and certainly impacts workers when it comes to Connecticut overtime pay. For example, if an employer pays someone as an independent contractor when that person meets the definition of an employee, the employer doesn’t have to pay overtime. The employer doesn’t have to pay a shift differential.

And all too often, 1099 independent contractors aren’t aware of their rights under the law. They may not be aware that, under the law, they should be classified as employees and should be entitled to Connecticut overtime pay.

The bottom line? If you have been designated a 1099 contractor or are being paid off the books, you may be entitled to overtime pay and other types of back pay and benefits. The only way to know for sure is to contact an employee lawyer. An employee lawyer will be able to provide you with all of the information you need in order to understand your options, and potentially sue the employer to get what is rightfully yours.

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