Independent Contractor vs. Employee │ In an attempt to reduce employee misclassification, the Department of Labor (“DOL”) has provided guidance on how to determine whether a worker is an employee or independent contractor. Unfortunately for employers, in the process of bringing clarity to the evaluation, they have given credence to the broad employer-employee definition used by the Fair Labor and Standards Act (FLSA).
For many years, employers have become familiar with the common law, “control” approach. As the name suggests, the “control” test analyzed the employer’s control over the worker’s activities (hours, instrumentalities of work, location, etc.). Although there was a FLSA definition of ‘employ’ concurrently in place, most employers undertook the control approach, as it was narrower than the FLSA alternative.
Despite being in place for years, and commonly known by California employers, it appears that the control test was not applied correctly. This is evidenced by the fact that the Department of Labor’s Wage and Hour Division (WHD) continued to receive, investigate, and ultimately enforce employee misclassification complaints at an alarming rate.
On July 15, 2015, in a memorandum entitled, “Administrator’s Interpretation No. 2015-1,” the DOL rejected the common law control test, in favor of the FLSA’s broader “to suffer or to permit work” definition. In part one of this two-part series, we outline the factors that business owners and employers need to be aware of when classifying their workers.
FLSA Definitions of Employee and Independent Contractor
In light of the DOL’s recent endorsement of the FLSA’s approach to classifying the employees and independent contractors, it is important for employers to become familiar with the FLSA definitions. The FLSA defines “employee” as an individual employed by an employer, and “employer” as including “any person acting directly or indirectly in the interest of the employee.”
As mentioned above, to ‘employ’ under the FLSA is defined as “to suffer or to permit.” The court in Antenor v. D&S Farms (1996) 88 F.3d 925, 929 has determined that an entity ‘suffers or permits’ an individual to work, if as a matter of economic reality, the individual is dependent on the entity. In other words, independent contractors are those with economic independence, who run their own business. On the other hand, employees are those who are economically dependent on the employer, regardless of their skill level.
Economic Realities Test
We now know that economic dependence is at the center of the employee-independent contractor analysis. Unfortunately, determining whether a worker is an employee or independent contractor is still a cumbersome analysis. The Supreme Court and Circuit Court of Appeals have developed a multi-factor ‘economic realities’ test to determine whether a worker is an employee or independent contractor under the FLSA. Below is a list of those factors, and a brief illustration of each:
The extent to which the work performed is an integral part of the employer’s business. See, e.g., Dole v. Snell (1989) 875 F.2d 802, 811 (holding that work performed by cake decorators “is obviously integral” to the business of selling cakes which are custom decorated.”);
The workers’ opportunity for profit or loss depending on his or her managerial skill. (worker’s decisions to hire others, purchase materials and equipment, advertise, and rent space may reflect managerial skills that will affect his or her opportunity for profit or less beyond a current job);
The extent of the relative investments of the employer and the worker. See, e.g., Dole v. Snell (1989) 875 F.2d 802, 811 (Comparing cake decorator’s $400 investment against employer’s business investments, including paying rent, advertising, operating expenses, and labor);
Whether the work performed requires special skills and initiative. (A highly skilled carpenter that uses his skills for a construction firm may not qualify, as his skills are not used independently. However, a carpenter who does specialized work for a variety of construction companies likely will qualify. It is imperative that skills be used in an independent way.);
The permanency of the relationship. (An employee with a long term relationship is more characteristic of an employee, rather than an independent contractor. Even if the relationship is scheduled to last even for a few weeks or months, it is still more likely to be an employee, because an independent contractor is more likely to finish one project, then end the relationship.); and
Control exercised or retained by the employer. (The worker must control meaningful aspects of their work, such that it is possible to view the worker as conducting his or her own business. An employer’s lack of control of a worker is not particularly telling if the worker works from home or offsite.)
It is important to note that each factor should be evaluated under the premise that the employer-employee relationship is very broad. Additionally, the factors are evaluated in their totality. The six factors are not a checklist, and no single factor is independently determinative.
In the second post of this two-part series, learn what the DOL’s interpretation means and why it is significant for business owners and employers. Read Part 2 of Is Your Worker An Employee Or Independent Contractor >>>
Every employment law situation is unique and this Employment Law article is not replacement for legal counsel. If you have questions on how these changes may affect your business, contact the Employment Law Department at Young Wooldridge, LLP.