By: Susan Swatski, Esq. (firstname.lastname@example.org) and Jessica Seiden, Summer Associate
As workplaces take on organizational restructuring, many employees become misclassified as independent contractors. This misclassification has significant impact on workers, particularly in low wage industries. When employees are wrongly characterized as independent contractors, they do not receive labor protection rights, such as minimum wage, overtime, unemployment, and worker’s compensation. The U.S. Department of Labor’s Wage and Hour Division recently provided additional guidance to aid employers in determining how to classify their workers.
An agreement between an employer and a worker designating the worker as an independent contractor is not indicative of the relationship and is not relevant to the status. The Fair Labor Standards Act (“FLSA”) applies a multi-factor “economic realities test” to determine whether a worker is an employee or an independent contractor. A worker who is dependent upon finding employment in the business of others is considered an “employee,” whereas a worker in business for him or herself is considered an “independent contractor.” The Administrator’s application of the “economic realities” test considers six independent factors, and no factor alone is sufficient to determine if a worker is “economically dependent” on the employer; all of the factors must be considered in each case.
The first factor to be considered is whether the work done is an “integral part of the employer’s business.” If the work performed is integral to the employer’s business, it is more likely the worker is economically dependent. Work can be integral even if it is performed away from the employer’s premises. The second factor is whether the “worker’s managerial skill affects the worker’s opportunity for profit or loss.” A worker in business for his or herself will typically have such an opportunity for profit. The focus is whether the worker exercises managerial skills and whether those skills affect the worker’s opportunity for both profit and loss. The third factor to be considered is “how the worker’s relative investment compares to the employer’s investment.” An independent contractor makes investments that support a business beyond one particular job. These investments must be significant to indicate the worker’s independence. Investing in tools and equipment is not necessarily a business investment or capital expenditure that indicates the worker is an independent contractor, because they may simply be required to perform the necessary work for the employer.
The fourth factor is whether “the work performed requires special skill and initiative.” Business skills, judgment, and initiative are more indicative of independent contractor status than technical skills that are used to perform the work. Even specialized skills do not indicate that workers are in the business for themselves. The fifth factor employers should consider is whether the “relationship between the worker and employer is permanent or indefinite.” Permanency suggests employment status, while working on a single project that is not continuous or repeating is more akin to an independent contractor. A lack of permanence with an employer is indicative of independent contractor status if it results from the worker’s own independent business initiative, rather than the operational characteristics of the industry. The sixth and final factor to be considered is the “nature and degree of the employer’s control.” A worker must maintain and exercise meaningful control of his or her work to be considered an independent contractor.
Under the FLSA’s broad definition of employ as “to suffer or permit to work,” most workers fall into the employee category. This expansive definition must be taken into account while applying the “economic realities” test to determine if a worker is truly an independent contractor. Taking into account the ultimate issue of whether the worker is in business for him or herself or economically dependent in the application of the “economic realities” test will prevent the detrimental outcomes of misclassification.
If your company hires independent contractors, you should consider having skilled employment counsel review those workers’ relationship with the company to ensure compliance with the FLSA.