According to a recent article by Sal Simao and Joanna RIch of Ford & Harrison, LLP, overlapping and sometimes conflicting federal and state laws in the United States govern the employment relationship and determination of whether a worker is an employee or an independent contractor.
At the federal level, the Fair Labor Standards Act governs maximum hour and minimum wage requirements for most workers. Part of a legislative plan to get more Americans back into the workforce after the Great Depression of the 1930s, the FLSA relies on the following broad definitions to determine which workers fall within its scope:To employ is “to suffer or permit to work.”An employee is “any individual employed by an employer.”An employer is “any person acting directly or indirectly in the interest of an employer in relation to an employee.”
However, different states may use different tests to determine whether a worker is an employee. Generally, the more control the employer exercises – or even reserves the right to exercise – over the worker’s means and methods of work, the more likely it is the worker will be considered an employee.
Independent contractors are workers engaged in an independent trade, business or profession in which they offer their services to the general public. The hallmark of an independent contractor is that he or she is not economically dependent on one employer. Independent contractors are generally able to control how, when and where the work is performed.
To determine whether a worker is a bona fide independent contractor, courts use the following factors to analyze the economic reality of the parties’ relationship:Who has the right to control the work? If the employer can tell the worker how, when, and where to perform the work, the worker is likely an employee. The employer’s level of supervision or requirement that the worker report to a supervisor is also considered.Is the work an integral part of business operations? If the worker’s services form an integral part of the employer’s business, the worker is likely an employee.Did the worker make an investment in his or her business? A worker who has invested in his or her own equipment, supplies, facilities, or training is more likely an independent contractor. Generally, courts will compare the worker’s investment with the employer’s investment.Is there an opportunity for profit or loss? Is the worker’s opportunity for profit or loss determined by the employer, or the worker’s own managerial skill? For example, if the worker can make a profit by being more efficient or hiring helpers, that worker is likely an independent contractor. On the other hand, a worker that can increase earnings only by working more is likely an employee.Does the work require specialized skill? This factor is often dependent on the industry and the employer’s business. Highly skilled workers can be employees, depending on the nature of the work or the industry.
In July 2015, the U.S. Department of Labor issued “Administrator’s Interpretation 2015-1,” which argued that the economic realities test should be applied in the context of the FLSA’s broad scope of employment and the Act’s “suffer or permit to work” standard. The Interpretation concluded that “most workers are employees” and cautioned against mechanical application of the economic realities factors and over-emphasizing the right-to-control factor.
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