A common complaint among workers in today’s economy is the eagerness of many employers to label them as an independent contractor. The Department of Labor has now issued a memorandum criticizing the overuse of the term “independent contractor” and clarifying what constitutes an employee under the Fair Labor Standards Act (FLSA).

Economic Realities of Independent Contractor vs. Employee

Courts apply an “economic realities” test to determine if a worker is an employee or an independent contractor. In most circumstances, the test asks the following questions:

• To what extent is the worker’s output integral to the employer’s business?
• Does the worker have an opportunity to make or lose money based on his or her managerial skill?
• What are the relative investments of the employer and the worker? (If the worker has made an investment, this would indicate that he or she is an independent contractor.)
• Does the work require special skills or initiative? (The Department of Labor cites electricians, carpenters, and construction workers as examples of the types of workers that typically operate as independent contractors.)
• How permanent is the relationship between the employer and the worker? (If the work is permanent, that would suggest that the worker is an employee.)
• How much control does the employer exercise (or retain)?

The Department of Labor’s memo emphasizes that the test should be viewed from the lens of the FLSA’s “suffer or permit” standard. This refers to a clause in the FLSA which states, “’Employ’ includes to suffer or permit to work.”

According to the memo, the “suffer or permit” standard means that a worker is an employee if he or she is dependent on the employer. The standard exists in order to broaden the FLSA’s applicability, by expanding the definition of an employer/employee relationship. The memo states that the economic realities test is not determinative, and that the most important factor in determining whether a worker is an employee is whether he or she is economically dependent on the employer.

Other clarifications offered in the memo include:

Even if an employer and worker have an agreement stating that the worker is an independent contractor, this agreement will have no bearing on whether the worker is actually considered an independent contractor or an employee.

Whether a worker receives a 1099-MISC from the IRS (which is intended for independent contractors) is not considered evidence that the worker is actually an independent contractor.

The economic realities test is qualitative, rather than quantitative, meaning that not all of the factors need to be present in order for the worker to be considered an employee. [Read more…]