U.S. Department of Labor Issues Guidance on Who is considered an Employee and Independent Contractor.

Nicholas Fortuna, July 15, 20015

The Wage and Hour Division of the U.S. Department of Labor issued a guidance memorandum last week using an expansive definition of an employee to curb misclassifications of employees as independent contractors. According to the Department of Labor, the Fair Labor Standards Act (FLSA) defines persons as employees if they “suffer or permit to work” or are considered an employee under the “economic realities” test. In other words, is the worker genuinely in business for himself as determined by the six factors discussed in the Department of Labor’s guidance?

The Department of Labor is concerned that employees misclassified as independent contractors do not receive the required benefits and protections, such as minimum wage, overtime pay, unemployment and worker’s compensation insurance, and workplace protections. Misclassification also results in lower tax revenues for government.

Different from the common law control test, which determines whether a worker is and employee based on the employer’s control over the worker, the economic realities test of the working relationship is a more expansive approach to who is considered an employee. The FLSA’s standards broaden the scope of employment relationships. In fact, the FLSA’s statutory definitions, including “suffer or permit,” rejected the common law control test that was prevalent at the time.

To determine whether a worker is an employee or an independent contractor pursuant to the FLSA, courts use an “economic realities” test, which focuses on whether a worker is economically dependent on the employer or in business for himself. A worker who is economically dependent on an employer is “suffered or permitted to work” by the employer. Following this approach, most workers would be considered employees.

The “economic realities” test is the consideration of a number of factors to determine if a worker is truly in business for himself or an employee. The determination is fact specific to each situation.

Factors Considered:

1. Is the work an integral part of the employer’s business?
A worker is more likely to be an employee under the FLSA if they perform the primary work of the employer. An independent contractor’s work is unlikely to be integral to the employer’s business.
2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
If it is the worker’s business, then his managerial skill will often affect opportunity to obtain additional work from other parties, thereby enhancing profit. Conversely, poor management may lead to a loss.
3. How does the worker’s relevant investment compare to the employer’s investment?
Considering the nature of the worker’s investment, and comparing it to the employer’s investment, helps determine whether the worker is engaged in an independent business. Courts have found if there is a substantial difference in relative investments between the worker and employer that leans toward finding the worker is an employee. . For example, according to some courts, tools and equipment are not necessarily a business investment that indicates the worker is an independent contractor.
4. Does the work performed require a special skill or initiative?
A worker’s business skills, judgment, and initiative, not his technical skills, will aid in determining whether a worker is economically independent. Again, the courts look to see if the worker’s business acumen enhances his ability to make a profit, not whether he is particularly good at performing a task.
5. Is the relationship between the worker and employer permanent or indefinite?
Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee.
6. What is the nature and degree of the employer’s control?
To qualify as an independent contractor, the worker must control the meaningful aspects of the work performed. For example, if the employer determines the means and methods of performance, the location and time of performance, that would lean towards finding the worker is an employee.

Whether a worker is an employee under the FLSA is a legal question determined by the economic realities of the working relationship. Following the Department of Labor’s expansive view of who is an employee will result in most workers being considered employees under the FLSA.