Are you an Independent Contractor or an Employee?

Fair Labor Standards Act

Determining whether you are an independent contractor or an employee could significantly affect your rights to compensation.  For example, independent contractors are not entitled to minimum wage, overtime, unemployment  benefits, and workers compensation, while employees are generally entitled to these benefits and more. Therefore, it is extremely important to understand the difference between independent contractors and employees so that you can ensure that you are properly compensated under the state and federal wage laws.

While determination of independent contractor status is largely governed by individual state law, most jurisdictions apply either a five factor or a six factor test.  Below is a list of the six factors applied in many jurisdictions.  The sixth factor listed below is generally the factor that is withheld in jurisdictions applying a five factor test.

  1. What degree of control does the alleged employer have over the alleged employee?
  2. What investments have each of the parties made with respect to their working relationship?
  3. What is the degree to which the alleged employer has over the profit and loss of the alleged employee?
  4. What level of skill and initiative is required in performing the work for the alleged employer?
  5. How permanent is the working relationship? and
  6. Is the work performed by the alleged employee an integral part of the alleged employer’s business?

In determining whether or not a person is an employee or an independent contractor, no single factor will be determinative.  Therefore, a court must analyze the facts regarding each of these factors to determine whether or not the person is an employee or a contractor.

What is the degree of control exercised by the alleged employer over the alleged employee?  Although, courts will frequently claim that none of the above factors are more important than any other, control is a theme that runs throughout each of the five or six factors applied by the court.  If a person is told when, where and how to perform a job, this factor will weigh in favor of finding employee status.  For example, when you have a toilet that is not working properly, you may call a plumber to perform repairs.  That plumber will tell you when he or she is available and you will make sure someone is home to let the plumber in to perform the work.  Also, most people would not tell the plumber how to fix the toilet, but would rather describe the problem and then get out of the way to allow the plumber to do his or her job.  This arrangement is a classic independent contractor relationship where you are interested in the end result rather than the independent contractor’s methods for getting the job done.

What are the relative investments of the parties?  Independent contractors perform the job using their own methods and using their own tools; employees generally use their employer’s tools and perform the job as requested by the employer.  While the use of an alleged employee’s tools is not determinative of independent contractor status, it is a factor that tends toward a finding of independent contractor status.  As mentioned above, control is a recurring theme in making this determination and having a person use your tools suggests a level of control that is consistent with an employee status.

What control does the alleged employer have over the profit or loss of the alleged employee?  An independent contractor typically has working relationships with several employers.  If one job or work relationship falls through, the independent contractor typically has other projects that he or she can be working on.  For example, if I decide to stop using my normal plumber and switch to a new plumber, my old plumber will likely be affected very little if at all.  On the other hand, if I decide to fire my office assistant for a new employee, my old assistant’s weekly compensation will be significantly affected.

What level of skill or initiative is required to perform the job?  Independent contractors generally perform work that the alleged employer is not qualified or able to perform itself.  For example, law firms generally hire lawyers as employees even though being a lawyer generally requires significant skill and initiative.  However, law firms who use an accountant to maintain their books would ordinarily consider that person to be an independent contractor.  Again, the control theme is alive within this factor.  If the job requires significant skill and initiative that I do not possess, I will not generally be able to exercise control over the person that I hire to perform the job.

Is the job performed integral to the alleged employer’s business?  This factor is excluded in some jurisdictions, but control is again a common theme.  A company will generally require that their core products or services be created or performed in a certain way and will therefore, exercise control over those processes.  Most companies should have those core functions performed by employees rather than independent contractors to ensure quality and accountability.  In states such as Kansas that require this sixth factor, many employers such as roofing companies whose core service is to install roofs on buildings should have employees who perform the installations rather than independent contractors.  The construction industry is often found to have improperly misclassified its workers as independent contractors.

The misclassification of employees as independent contractors significantly affects these workers’ compensation.  The decision by an employer rarely is driven by a desire to avoid paying overtime or minimum wages, but typically is driven by a desire to simplify payroll processes and avoid paying workers compensation and unemployment insurance.  If you believe you may have been improperly classified as an independent contractor, contact an experienced employment lawyer today for a free consultation.