Independent Contractors vs. Employees
- Improperly classifying an employee as an independent contractor has significant legal implications. In addition to potential FLSA and state wage and hour law violations, it could also result in tax deficiencies, anti-discrimination law violations, leave law violations, ERISA violations, OSHA violations, I-9 violations, unemployment insurance shortfalls, insufficient workers’ compensation coverage, and substantial civil and criminal penalties.
- The parties to an employment relationship do not get to decide whether a worker is an employee or an independent contractor. Indeed, even if a worker contractually agrees—or prefers—to be classified as an independent contractor, such a decision has no effect on his or her classification. Instead, whether a worker is classified as an employee or an independent contractor is determined by law, based on the facts and circumstances of the parties’ relationship.
- What follows is a non-exhaustive list of common—but incorrect—misconceptions regarding the appropriate classification of workers:
- The issuance of a 1099 warrants independent contractor status;
- Having an employer identification number (EIN) renders someone an independent contractor;
- Incorporating or forming a distinct business entity warrants independent contractor status;
- Referring to someone as a “consultant” renders that person an independent contractor;
- Following “common industry practice” automatically allows a worker to be classified as an independent contractor;
- Signing an independent contractor agreement renders someone an independent contractor;
- Allowing a worker to work from home or enjoy a degree of flexibility renders that person an independent contractor; and
- Paying someone in commissions or in cash only (not via payroll) renders that person an independent contractor.
- In order to determine whether a worker is legally considered an employee or an independent contractor under the FLSA, courts look to the “economic realities” of the worker’s situation to assess whether the worker is economically dependent on the hiring party to earn a living (in which case the worker is an employee), or self-reliant and truly in business for himself or herself (in which case the worker is an independent contractor).
- Note that different laws use different standards to determine whether a worker is an employee or an independent contractor. In many respects, the definition of “employee” is more expansive and far-reaching under the FLSA than it is under some other laws.
- Courts generally consider and weigh six factors in assessing the “economic realities” of a worker’s relationship with the hiring party and, thus, whether the worker is an employee or an independent contractor. The factors should not be tallied, and their application should not be overly mechanical. Instead, the factors are used to shed light on the overarching issue of economic dependence. While all factors must be considered, no single factor is dispositive. The six factors are as follows:
- (1) Is the work performed by the worker an integral part of the hiring party’s business?
- If the answer is yes, the worker is more likely to be an employee. If the answer is no, the worker is more likely to be an independent contractor.
- For example, when a landscaping company hires a worker to perform landscaping work, or when a call center hires a worker to answer the phones, such work is an integral part of the hiring party’s business, weighing in favor of employee status. By contrast, when a landscaping company engages a website designer to build its website, or when a call center engages an individual to clean its facility every week, such work is not an integral part of the hiring party’s business, weighing in favor of independent contractor status.
- (2) Are the worker’s opportunities for profit or loss dependent on his or her managerial skill?
- If the answer is yes, the worker is more likely to be an independent contractor. If the answer is no, the worker is more likely to be an employee.
- For example, when a pest control worker performs work at client sites as assigned by the hiring party, does not independently solicit work, does not endeavor to reduce costs, and has a workload dependent on the work available through the hiring party, the worker’s managerial skill does not affect his opportunity for profit or loss, weighing in favor of employee status. By contrast, when the same worker markets his services, negotiates contracts, decides which jobs to perform and how to perform them, has the option to hire helpers to assist in performing the work, and endeavors to reduce costs, the worker exercises managerial skill that affects his opportunity for profit or loss, weighing in favor of independent contractor status.
- (3) How does the worker’s investment compare to the hiring party’s investment?
- The larger the relative share of the worker’s investment, the more likely it is that the worker is an independent contractor. The smaller the relative share of the worker’s investment, the more likely it is that the worker is an employee.
- For example, when a worker on a construction site provides her own tools and personal equipment, but the entity she performs work for provides insurance, heavy machinery, lodging expenses, and the cost of other labor, in addition to investing in advertising and client acquisition, the hiring party’s relative investment, far outweighing that of the worker, is indicative of employee status. By contrast, when the worker invests more heavily in such business expenses, the worker’s investment is indicative of independent contractor status.
- (4) Does the work require special skill and initiative?
- If the answer is yes (including with regard to the worker’s use of his or her own independent judgment), the worker is more likely to be an independent contractor. If the answer is no, the worker is more likely to be an employee.
- For example, when a highly skilled electrician provides services for a construction company and exercises his skills by making independent judgments at the job site, determining the sequence of work, deciding which materials are needed, and considering bidding for the next job, such facts weigh in favor of independent contractor status. By contrast, when an electrician requires training, is assigned to certain jobs, and is merely told which work to perform and where, the electrician may not use sufficient independent judgment and initiative, weighing in favor of employee status.
- (5) Is the relationship between the worker and the hiring party permanent or indefinite?
- If the answer is yes, the worker is more likely to be an employee. If the answer is no, the worker is more likely to be an independent contractor.
- For example, when an IT worker is hired by a company on an indefinite, at-will basis, and has been working with the company for several years, the degree of permanency in the relationship weighs in favor of independent contractor status. By contrast, when an IT worker is hired on a limited duration, fixed-project basis, such facts weigh in favor of employee status.
- (6) What degree of control does the hiring party have over the manner in which the work is performed?
- The greater the degree of control held by the hiring party, the more likely it is that the worker is an employee. The smaller the degree of control, the more likely it is that the worker is an independent contractor.
- For example, when a hiring party dictates how a maintenance worker must perform his work, sets the worker’s hours and pay rate, issues assignments to the worker, prohibits the worker from hiring assistants, and limits the worker’s ability to work for other parties, such control weighs in favor of employee status. By contrast, when a maintenance worker performs the work as he deems appropriate, sets his own schedule and pay rate, hires assistants when needed, and is free to work for other parties, such facts weigh in favor of independent contractor status.
