Are You an Employee or an Independent Contractor?

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Has your employer denied you benefits or overtime pay because it considers you an independent contractor?

As an employee, you are entitled to certain protections under the federal Fair Labor Standards Act (FLSA). But many employers have reclassified employees as independent contractors to save money or reduce their overhead. If this happens to you, you are no longer eligible for minimum wage, overtime pay, unemployment insurance, workers’ compensation, and more.

The Wage and Hour Division of the Department of Labor (DOL) believes that between 10 and 30 percent of employers may misclassify employees as independent contractors. The agency takes this problem seriously, explaining on its “Misclassification of Employees as Independent Contractors” page that “when employers deliberately misclassify employees in an attempt to cut costs, everyone loses.” As a result, the DOL has increased its investigation and enforcement of independent contractor classifications. But even so, filing a lawsuit might be the only way to get your employer to change your status.

How to Determine Your Status

scalesHow do you know whether you really are an independent contractor?

In 2015, the DOL issued regulations that tried to define whether a worker is an employee based on “the economic realities of the working relationship.” The DOL’s goal is to separate employees—who are “economically dependent” on employers—from independent contractors—who are in business for themselves and not reliant on any particular employer.

Unfortunately, the test is not a hard-and-fast rule. There is no bright line telling employers or workers when a relationship crosses the threshold between employee and independent contractor.

Here are the six factors that the government typically uses—and that you can use—to assess the economic reality of your working relationship with an employer.

  1. Is the work you perform an “integral part of the employer’s business”? If so, it is more likely that you are an employee. For example, if you answer calls in a call center, you are doing the primary work of that employer. Even if there are hundreds of other workers doing the same job, your work is integral to the employer. This factor is the same even if you work from home or in an off-site location.
  1. Does your opportunity for profit or loss depend on your managerial skills or just your technical skills? Do you hire or supervise other workers? Do you decide what to invest in (such as advertising or equipment purchases) to increase your earnings? Do those decisions affect not only this employer but the next job too? If so, it is more likely that you are working for yourself as an independent contractor. Working more hours or doing more jobs to increase your earnings from a single employer does not depend on managerial skills, so this does not apply to every increase in earnings.
  1. Have you made significant financial investments in your work relative to what your employer has invested? If you have not invested anything in equipment or materials, you are almost certainly an employee. But not all investments are the same; it is the relative amounts of investments that govern this factor.
  1. Does your work require special skills or initiative? This question is not about special technical skills that you may need to do your job. Instead, this is asking about “business skill, judgment, and initiative.” Does the work you do encompass marketing, making decisions about orders or employees, or negotiating contracts for additional jobs? If not, you are probably an employee.
  1. How permanent is the work relationship you have with an employer? A permanent or indefinite (usually “at will”) work relationship indicates that you are likely an employee. If instead you work on individual jobs or projects for different employers without an expectation that you will continue doing work for any one employer, you are probably an independent contractor.
  1. How much control does the employer exercise over your work? This is a complex factor involving who sets the standards for your work product. Working from home, having flexible hours, or not having a dress code are not the sort of “control” the DOL is concerned with. Instead, consider whether you have to complete specific training for an employer or fill out recurring paperwork or forms for the company, indicating that it is running the business and that you are an employee.

Bear in mind that no single factor can answer the question. It is the combined effect of your answers to each one that decides whether you should be protected as an employee or whether you are in business for yourself as an independent contractor. Courts can also consider additional factors.

Note that how your employer has labeled you, even if you agreed to that label or if it is part of your job description, is not one of these factors. Most workers are employees, according to the DOL, and should be protected as such.

Summing It Up

In recent years, some employers have begun classifying workers as independent contractors rather than employees to avoid the need to pay the minimum wage, overtime, or other benefits. To determine whether a person is an employee or independent contractor, the DOL devised the “economic realities” test. The agency considers the following six factors in making its determination:

  1. Is the work you perform an “integral part of the employer’s business”?
  2. Does your opportunity for profit or loss depend on your managerial skills or just your technical skills?
  3. Have you made significant financial investments in your work relative to what your employer has invested?
  4. Does your work require special skills or initiative?
  5. How permanent is the work relationship you have with an employer?
  6. How much control does the employer exercise over your work?

If you need help deciding whether you are being paid correctly under the law, contact our office so we can evaluate your situation using these six factors.