Are You an Employee or Independent Contractor? Why It Matters

Many workers believe that their employer determines whether their status is as an independent contractor or employee, simply by designating the worker as such on an IRS Form 1099 or W-2. However, this is not the case. The relationship a worker has with an employer is governed by law, not by the employer’s judgment. Your status as an employee or independent contractor is important because it significantly impacts your rights in the workplace and the remedies available to you for unlawful conduct by your employer.

In this post, we’ll discuss (1) the legal test for determining your status as an employee or independent contractor; and (2) why your status determination is important.

The Test for Determining Employee/Independent Contractor Status

The federal Fair Labor Standards Act (FLSA) uses the “economic realities test” to determine whether an individual is an employee or an independent contractor. The factors considered in the economic realities test are listed below. This test is not exclusive; additional factors may be considered if they shed light on the true nature of the working relationship.

The extent to which the work performed is an integral part of the employer’s business

Workers are more likely to be employees if they perform the primary work of the employer. A worker’s job functions may be integral to an employer’s business even if performed away from the employer’s premises, at the worker’s home, or on the premises of the employer’s customers. For example, assume that a company sells custom-made cupcakes. Workers employed to decorate the cupcakes would be integral to the employer’s business of selling custom-made cupcakes. Therefore, they would be more likely to be considered employees.

Whether the worker’s managerial skills affect his/her opportunity for profit and loss

A worker who is in business for himself has the ability to experience profit, but also a loss. Managerial skills that would entail an independent contractor status includes having the ability to make independent business decisions. This would include making decisions on business investments or which help to hire. Although working more jobs or longer hours will increase a worker’s opportunity for profit, this decision is not considered to be a managerial skill and shouldn’t be considered in an analysis.

The related investments in facilities and tools required by the worker and the employer

A worker must make some investment (and undertake a risk of loss) to indicate that he is an independent contractor. Additionally, the worker’s investment must compare favorably to the investment of the employer.

The worker’s skill and initiative

A worker’s skills must indicate that the individual exercises independent business judgment or initiative to be considered as an independent contractor. Whether or not an employee is highly skilled does not factor into the analysis. Both independent contractors and employees may be highly skilled.

The permanency of the worker’s relationship with the employer

A permanent or indefinite relationship with a given employer may indicate that the worker is an employee for the organization. However, this is not conclusive. What is important is whether the length of the relationship is by the worker’s choice or the structure of that particular industry. If the length of the relationship is by the worker’s choice, this is an indication that the worker may be an independent contractor. If the length of the relationship is determined by the industry the worker is employed in, this indicates that the worker may be an employee.

The nature and degree of control by the employer

An independent contractor works independently and is relatively free from control by an employer.

Rights of Employees v. Independent Contractors

Independent contractors’ rights are largely governed by a state’s contract law. Employees, on the other hand, are entitled to the protection of numerous state and federal laws that simply aren’t available to independent contractors. Employers (inadvertently or, sometimes, intentionally) misclassify workers as independent contractors in order to avoid having to comply with these laws. Some examples of exclusions to independent contractors include:

  • The FLSA, which governs overtime and minimum wage laws, does not apply to independent contractors. Therefore, independent contractors have no rights to require an employer to pay them overtime or the minimum wage.
  • The laws protecting workers against unlawful discrimination and retaliation, including but not limited to: Title VII of the Civil Rights Act of 1964; The Americans with Disabilities Act; The Equal Pay Act; the Age Discrimination in Employment Act; the FMLA; the Florida Civil Rights Act; and many whistleblower statutes do not apply to independent contractors.
  • Independent contractors are not entitled to unemployment insurance nor are they entitled to receive workers compensation in the event they are injured on the job.
  • Employers are not required to verify that their independent contractors are U.S. citizens or covered by a work visa. Employers who misclassify their employees as independent contractors are thus able to exploit low-wage migrant workers. On average, roughly 3 million migrant and seasonal workers are expected to reside in the United States each year. Many of the violations and abuse that are experienced by migrant workers go unreported out of fear of repercussions and/or deportation.
  • Independent contractors are not covered by the National Labor Relations Act. This means that employers can prevent their workers from organizing and forming a union by misclassifying them as independent contractors.
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