QUERY: How do I determine whether a worker is an “employee” or “independent contractor” for wage purposes?

RESPONSE: The following material is found in Ceridian's HR Compliance Reference System:

The Fair Labor Standards Act: Economic Realities Test

The Fair Labor Standards Act (“FLSA”) and state wage laws may apply only to workers designated as employees and not to independent contractors.  Thus, the proper classification of workers is critical to determine the application of these laws.

State courts often use the same test to determine an individual’s employment status under state law, as federal courts have developed to determine whether an individual is an employee or an independent contractor under the FLSA. 

Under this so-called “economics realties” test, the courts examine factors focusing on the total activity or situation of the relationship.  An employee is one who is dependent upon the business to which the individual renders service.

Significant factors include the following:

§         An employee status is more likely if the services performed are an important part of the employer’s business.

§         Longer-term relationships reflect employee status.

§         An independent contractor status is more likely if the worker has an investment in the facilities and equipment.

§         An independent contractor status is more likely if the worker has a greater chance for profit/loss.

§         An independent contractor status is more likely if the worker has an independent business.

§         An independent contractor status is more likely if the employer only controls the end result.

The more an employer dictates work rules and controls equipment and materials and the less skill the job requires, the more likely it is the workers are employees and not independent contractors.  On the other hand, the more workers have control over the manner and method of the work and have invested in equipment and materials, the more likely it is they are independent contractors and not employees.

Because the FLSA is designed to provide maximum protection to employees, the Department of Labor and the courts in close cases likely will give the benefit of the doubt to the worker and determine the worker is covered by the FLSA.

Because the issues related to independent contractor status are complex, it is wise to consult with an attorney before treating a worker as an independent contractor.

Examples:

§         Pipe welders were properly classified as independent contractors under the FLSA and were not entitled to overtime compensation where the following apply:

·         They did not work exclusively for one company.

·         They were in control of the manner and method of welding.

·         They supplied their own tools and trucks.

§         Operators of six gasoline stations were employees and not independent contractors where the following apply:

·         The employer controlled the day-to-day operations of the station.

·         The station operators had no meaningful opportunities for profit or risk of financial loss.

·         The operators had no significant investment in equipment or materials.

·         The operators worked exclusively for the employer.

·         The operators did not regularly use special skills.

§         Temporary day workers were not independent contractors as claimed by an employment agency when the following apply:

·         They received a fixed hourly rate established by the agency.

·         They were directed by the agency as to what time they must arrive.

·         They were directed by the agency as to what behavior to exhibit at the client companies.

·         They were directed by the agency as to what footwear to wear.

·         The tasks they performed required no specialized skill.

·         They made no investment in equipment and materials.