Employee vs. Independent Contractor
Sometimes employers wrongly classify employees as independent contractors. This can create problems for the misclassified employees for a number of reasons. First, by classifying an employee as an independent contractor, the employer can avoid paying certain payroll taxes that would otherwise have to be paid for the employee. The employee (now independent contractor) is suddenly responsible for paying those taxes. Second, an independent contractor is not entitled to all the rights and legal protections that comes with being an employee. For example, employers may not have to pay overtime pay to independent contractors when the contractor works more than 40 hours in a work week.
Common Law Control Test
Under the common law control test courts examine three factors to determine if a person is an employee or legitimately classified as an independent contractor. The common law control test is used by the IRS and some states. The three factors are:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Behavioral- Courts will examine if the employer has the right to control or direct the worker in how she does her work. The more control the employer appears to have over the way the worker does her work, the more likely it is for courts to find that a worker is an employee rather than an independent contractor. Particularly important is the type of instruction given, the degree of instruction given, what kind of evaluation systems exist, and what kind of training the employer gives to their workers.
Financial- Financial factors refer to facts that show whether or not the business has the right to control the economic aspects of the worker’s job. Courts look at the type of investments the worker makes in their own tools and equipment, whether the worker incurs unreimbursed expenses (unreimbursed expenses would point to a worker being an independent contractor), opportunity for the worker to make a profit or a loss, if the worker is free to pursue other opportunities in the market, and the method of payment used to pay the worker.
Type of Relationship- Type of relationship refers to facts that show how the worker and business perceive their relationship to each other. Theses facts include are there written contracts and what do those contracts say, what type of employee benefits the worker receives, the permanency of the relationship between the employer and the worker, and how key the services provided by the worker are to the employer’s business.
Economic Realities Test
The economic realities test is used by the federal Department of Labor and courts when deciding if a worker is an employee for the purpose of coverage under laws like the Fair Labor Standards Act and the Family Medical Leave Act. The economic realities test seeks to get at the question of whether the worker is economically dependent on the employer.
The test examines 6 factors. These factors are:
a) The nature and degree of the employer’s control over the time, manner and method of the worker’s work. The “control” factor should not play too big a role in the analysis of whether a worker is an employee or an independent contractor. All relevant factors should be examined, and cases must not be analyzed using the control factor alone. The DOL gives the example of a worker who works from home. An employer’s lack of control over workers is not particularly telling if the workers work from home or offsite. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as conducting their own business. And the worker’s control over the important parts of the work must be more than theoretical. The worker must actually exercise it.
b) The worker’s opportunity for profit or loss. The worker’s opportunity for profit or loss is focused on how the managerial skill of the worker determines profit or loss. A worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job. The DOL cautions a worker’s ability to work longer hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill do not do much to differentiate between employees and independent contractors. Both would probably earn more if they work more and if there is more work available. It is also important the worker has the opportunity for profit AND loss.
c) The worker’s investment in equipment, materials or their own employees. The worker’s investment in equipment, materials or their own employees is examined in the totality and relative to the investment of the employer. An independent contractor typically makes investments that support a business as a business beyond any particular single job or employer. The worker’s investment should not be relatively minor compared with that of the employer. If the worker’s investment is relatively minor it suggests that the worker and the employer are not on similar footings and that the worker may be economically dependent on the employer.
d) Whether the worker’s position required special skill. For the purposes of the test determining whether the worker is economically independent, a worker’s “special skills” are their business skills, judgment, and initiative, not his or her technical skills. The fact that workers are skilled is not itself indicative of independent contractor status.
e) Whether the services provided by the workers were an integral part of employer’s business. Seeing if the work performed is integral to the employer’s business requires examining the type of duties the worker performs. Work that is integral to the employer’s business are usually those tasks that are performed so the business can operate. For a business that provides plumbers to fix residential homes, the plumbers are integral to the business while an account may be not. Work can be integral to a business even if the work is just one component of the business and/or is performed by hundreds or thousands of other workers. The DOL gives the example, of a worker answering calls at a call center along with hundreds of others. That worker is performing work integral to the call center’s business even if that worker’s work is the same as and interchangeable with many others’ work.
f) Whether the relationship was permanent. Rather obviously, a worker who is truly in business for him or herself will not want a permanent or indefinite relationship with an employer because of the dependence that comes with such permanence or indefiniteness. Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee.
The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business. And the worker’s control over meaningful aspects of the work must be more than theoretical—the worker must actually exercise it.
Courts look at all these factors and sub-factors in making their decision. Some states will use different tests and factors in their state courts. It is important to talk to a lawyer in your state who is familiar with employment law. Please feel free to contact Atlanta employment attorney Benjamin Kandy for a free consultation. Attorney Kandy is barred in the State of Georgia.
The US Department of Labor, the IRS, and the states are cracking down on misclassified workers in order to recover the tax payments that employers avoid by misclassifying workers. Make sure that you are not being misclassified by your boss. Don’t let your employer take advantage of you by pushing their risk and responsibilities on you while keeping the benefits for themselves.
For further information see:
the IRS website.
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