On July 15, 2015 the Department of Labor issued an administrator’s interpretation regarding the widespread issue of employers misclassifying workers as independent contractors instead of employees. It has become a common phenomenon in the United States for employers to willfully misclassify their employees as independent contractors to cut labor costs and avoid paying such workers minimum wage, overtime pay, and other benefits such as unemployment insurance and worker’s compensation. Many workers are being deprived of their rights under the FLSA due to these misclassifications. Under the FLSA, employers are required to pay employees minimum wage and overtime pay for any hours worked over forty per work week.
The FLSA defines employ as “to suffer or permit to work”. This definition was intended to define employ as broadly as possible to cover the greatest amount of workers. Additionally, employee is defined under the FLSA as “any individual employed by an employer” and employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee”. Before the FLSA was enacted, the common law test to determine whether a worker is an employee or an independent contractor was called the “control” test. When the FLSA was enacted, Congress rejected the control test for a multi-factorial test called the “economic realities” test. This test focuses on whether a worker is economically dependent on an employer and thus an employee, or whether a worker is in business for his or herself and is thus an independent contractor.
The economic realities test is a four pronged test that analyzes the working relationship between the employer and the worker. In each case, all factors must be considered, and no one factor is controlling. The goal in applying the test is not to simply check factors off the list, but to apply a qualitative analysis to determine whether a worker is economically dependent on an employer or whether the worker is economically independent and in business for him or herself. Additionally, it is important to note that the economic realities of the relationship are determinative, and not the label the employer gives the worker. Therefore, simply because an employer labels a worker as an “independent contractor”, it does not necessarily mean the worker is truly an independent contractor.
The factors of the economic realities test include: 1) The extent to which the work performed is an integral part of the employer’s business; 2) the worker’s opportunity for profit or loss depending on his or her managerial skill; 3) the extent of the relative investments of the employer and the worker; 4) whether the work performed requires special skills and initiative; 5) the permanency of the relationship; and 6) the degree of control exercised or retained by the employer.
The first factor, “the extent to which the work performed is an integral part of the employer’s business”, is considered a compelling factor by many courts. If the work performed by a worker is considered to be an integral part of the employer’s business, it is likely that the worker is economically dependent on the employer, and thus likely that the worker is in fact an employee. Work can be considered integral even if the work in question is performed by many other workers in the business and even if the work is just a fraction of the work that the business does. For example, in a cleaning service company, maids would be considered integral to the employer’s business because the company is in business to provide cleaning services which the maids are responsible for.
The second factor analyzes “the worker’s opportunity for profit or loss depending on his or her managerial skill”. Typically, if a worker’s managerial skill will not only allow him or her to make a profit, but also to suffer a loss, this is usually an indication that the worker is in business for him or herself. TO be an independent contractor, these opportunities for profits and loss should extend beyond the worker’s present job, and could positively or negatively affect the worker’s future business opportunities. For example, a worker’s hiring, firing, scheduling, and marketing decisions illustrate managerial skills that will affect the worker’s opportunity for profit and loss that extends beyond a present job. However, the ability of a worker to work long hours and take on a larger volume of work is not related to a worker’s classification as an employee or an independent contractor. The amount of money a worker is able to earn as a result of high quality job performance does not represent a managerial skill and does not distinguish employees from independent contractors. If the relevant circumstances indicate that the worker’s managerial skill does not create an opportunity for profit or loss that goes beyond the worker’s current job, then the worker is likely not in business for him or herself and is an employee rather than an independent contractor.
The third factor, the extent of the relative investments of the employer and the worker, focuses on how much each person contributes to the employer/worker relationship. A worker must make a significant investment in the business that is relatively proportionate compared to investments made by the employer in order to be considered an independent contractor. If a worker’s investments are relatively small compared to the investments made by the employer, this is an indication that the worker may be economically dependent on the employer and thus is an employee. If an investment includes buying tools and equipment necessary for a worker to complete his or her job duties, though this may be considered a business investment, it is typically not large enough of an investment to signify that the worker is an independent contractor.
The fourth factor, whether the work performed requires special skills and initiative, assesses a worker’s business skills, judgment and initiative in the business. A worker’s technical skills, or even specialized skills used to perform work have no relevance regarding this factor. Workers that are highly skilled in their profession, but only provide their services in a manner directed by their employer, are typically considered employees and not independent contractors.
The fifth factor assesses the permanency of the relationship between the worker and the employer. Typically, a worker’s relationship with an employer that is permanent or indefinite is a good indicator that the worker is an employee. An independent contractor typically will work only one project for an employer, and the work relationship is not usually continuous or repeated beyond a given project. However, the fact that an employment relationship is not permanent or indefinite does not mean the worker is automatically an independent contractor. The critical component is whether the impermanence and definiteness of the position is because of an industry practice exercised by the employer, or whether it is because of the worker’s own business initiative. If it is because of the workers own business initiative, the worker is likely an independent contractor.
The sixth and final factor used to assess whether a worker is an employee or an independent contractor under the economic realities test is the degree of control exercised or retained by the employer. To be considered an independent contractor, the worker must have control of meaningful aspects of his or her work to the extent that the worker can be viewed as conducting his or her own business. The control must also be actually exercised by the worker, it cannot just be theoretical. The fact that a worker works from home or at a separate location is not necessarily indicative of being an independent contractor. The worker’s ability to control the hours that they work is also not alone significant. If an employer controls aspects of a worker’s job such as their schedules, dress code, and job duties, this would indicate that the worker is likely an employee. The “control” factor should not be given more weight than the other factors in the economic realities test. The FLSA covers workers even when the employer does not have adequate control over the worker, if they are otherwise economically dependent on the employer. This is a reason why the FLSA rejected the older common law control test in favor of the broader economic realities test.
Again, all of these factors must be considered in determining if a worker is an employee or an independent contractor, and no single factor is controlling. The vital determination to be made in assessing a worker’s status is whether the worker is economically dependent on the employer or if the worker is in business for him or herself. Correctly classifying workers is essential in order to ensure that true employees are protected by the FLSA’s minimum wage and overtime pay provisions.
The NYC employment lawyers at Fitapelli & Schaffer, LLP are strongly committed to protecting the rights of hard working employees. If you believe you are an employee, but are classified by your employer as an independent contractor, please contact us at (212) 300-0375, or visit our website at www.fslawfirm.com.