Hire him as an employee and he’s an employee. Hire her as an independent contractor, she’s an independent contractor. Employees get W-2’s and are eligible for benefits. Independent contractors get 1099’s, and aren’t. Easy, right? If it were that simple, the Department of Labor, the IRS and various states would not be fielding an increasing number of complaints from workers who (often rightly) claim to have been misclassified as independent contractors.
Misclassification costs everyone. Workers lose important protections like minimum wages, overtime pay, workers’ compensation and unemployment insurance. Governments lose tax revenue. And while employers might do it to save money, misclassification can prove costly.
Generally speaking, independent contractors are workers who enjoy economic independence, by operating a business of their own. Workers who are economically dependent on the employer, regardless of skill level, are employees covered by the Fair Labor Standards Act (FLSA).
The Department of Labor looks at the “economic realities” of the relationship to determine an individual’s proper classification. The “economic realities” test focuses on six factors to determine whether a worker is dependent on the employer or truly independent: (1) whether the work is an integral part of the employer’s business; (2) whether the worker’s managerial skill affects the worker’s opportunity for profit or loss; (3) the worker’s investment in the business relative to the employer; (4) whether the work performed requires special skill or initiative; (5) whether the relationship between the employer and worker is permanent or indefinite; and (6) the nature and degree of the employer’s control. The factors are not applied mechanically, but as tools for understanding the economic realities of each individual case.
A worker who performs tasks that are integral to the employer’s business is more likely to be an employee. A worker who manages his or her own operation, and who has the opportunity for profit, but can also realize a loss, is more likely to be an independent contractor.
An independent contractor generally makes some investment in the business and that investment must be “significant in nature and magnitude relative to the employer’s investment in the overall business.” In other words, a worker’s investment of a few dollars in the employer’s business does not make the worker an independent contractor for purposes of the FLSA.
The fact that the job requires specialized skill does not, in itself, denote an independent contractor relationship. However, the greater the worker’s skills, and the more the worker exercises those skills in an independent manner, the greater the likelihood the worker will be considered an independent contractor. A relationship with the worker that is either permanent or indefinite (at will) is indicative of an employment relationship. An independent contractor is more likely to have a relationship with the employer that has a definite ending.
The nature and degree of the employer’s control is still an important factor. The greater the worker’s control over meaningful aspects of the work, the more likely he or she will be viewed as an independent contractor. Flexible hours, for instance, do not by themselves make a worker an independent contractor.
Bottom line, workers who regularly perform services that are essential to the employer’s business are likely to be considered employees for purposes of the FLSA, regardless of the label the employer puts on them.
For a confidential analysis of your employee/independent contractor issues, or questions about TRC’s employment practice area, please contact Jerry R. Hogenmiller, Esquire at (412) 316-8689 or [email protected], or W. James Rogers, Esquire at (412) 316-8651 or [email protected].
Important Notice: This information is intended for general guidance only, and should not be used as a substitute for specific legal advice. For specific legal advice applicable to your situation, you should consult an attorney of your choice. Although believed to be accurate when written, no guarantee of completeness or accuracy to your particular circumstances should be implied. Laws, regulations, and court decisions in this area change frequently, and you should consult the attorney of your choice for up-to-date information.