Worker Classification: Employee or Independent Contractor?

June 27, 2019

Under federal law, a worker must be classified as either an employee or an independent contractor. This determination is important as employees are entitled to a number of protections that are not available to independent contractors. By way of example, independent contractors are not covered by the National Labor Relations Act, the Fair Labor Standards Act, or laws protecting workers against unlawful discrimination and retaliation. Courts and agencies apply different tests to determine proper worker classification.  The most predominant tests are the Right to Control and Economic Realities Tests.

Right to Control

The Internal Revenue Service applies common law rules, often referred to as the “Right to Control” test, to determine if a worker is an employee or an independent contractor. Each factor is designed to evaluate who controls how work is performed. Generally speaking, the test looks to:

  1. Behavioral Control. How much control does the company exercise over the employee? (more “yes” answers to the below questions means the worker is more likely an employee):
  • Does the company dictate how, when and where the worker does the work?
  • Does the company provide training to do the work?
  • Does the company supervise performance?
  1. Financial Control. Does the company have the right to control the financial and business aspects of the job? (more “yes” answers to the below questions means the worker is more likely a contractor):
  • Does the worker pay for his or her own business expenses?
  • Does the worker own or lease equipment or facilities? (computer, car, office or shop).
  • Does the worker have other customers or clients?
  • Is the worker paid by the project instead of paid salary or hourly wage?
  • Does the worker have the potential for profit or loss?
  1.  Relationship of the Parties. (more “yes” answers to the below questions means the worker is more likely an employee)
  • Is the worker eligible for benefits including a pension plan, insurance, paid time off or other benefits indicating an employee relationship?
  • Is the relationship permanent?
  • Does the worker provide core business services, which are generally performed by employees?

Courts making determinations regarding the application of federal anti-discrimination statutes, including Title VII of the Civil Rights Act of 1964, The Americans with Disabilities Act, The Equal Pay Act, the Age Discrimination in Employment Act, and the FMLA, as well as the Employee Retirement Income Security Act, generally apply a version of the Right to Control Test, as articulated by the U.S. Supreme Court in 1992 in Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318, 323 (1992).

The twelve factors considered under the Darden test are:

  1. The company’s right to control when, where, and how the individual performs the job;
  2. The skill required of the worker;
  3. The source of the instrumentalities and tools of the job;
  4. The location of work;
  5. The duration of the relationship between the parties;
  6. Whether the company has the right to assign additional projects to the individual;
  7. The extent of the worker’s discretion over when and how long to work;
  8. The method of payment;
  9. The company’s role in hiring and paying assistants;
  10. Whether the work is part of the regular business of the company;
  11. Whether the hiring party is in business; and
  12. The provision of employee benefits to the worker.

Economic Realities Test

Alternatively, the Department of Labor uses the “Economic Realities Test” to determine the employment relationship under the Fair Labor Standards Act. The Third Circuit Court of Appeals has adopted this test for FLSA purposes. It looks, generally, at the following:

  1. Nature and Degree of Control
  • Does the business owner or the worker control how the work is performed?
  1. Amount of Investment by the Worker
  • More investment by the worker in facilities and equipment means the worker is more likely a contractor.
  1. Permanency or Length of Relationship
  • Is the relationship permanent or temporary? Project based relationships are more typical of contractors.
  1. Skill
  • Does the work require special skill, judgment, foresight and initiative? The more routine the work, the more likely the worker is an employee.
  1. Level of Risk
  • Does the worker have an opportunity for profit or loss? Contractors manage their own businesses, strong managerial skills likely result in profit. Employees make money either way.
  1. Integration
  • To what extent are the worker’s services an integral part of the business? If tangential, the worker is more likely a contractor.

No single factor is dispositive in any of the above tests. Rather, courts and government agencies balance the factors. They may give certain items more or less weight depending on the industry involved.

To help ensure that an independent contractor classification is correct, make certain that a worker signs an independent contractor agreement that addresses the critical considerations outlined above. Do NOT, however, do the following:

  • Conduct performance reviews;
  • Provide paid time off or benefits;
  • Withhold taxes or issue a W-2;
  • Use an independent contractor full time for an extended period.

Finally, experienced employment counsel should be consulted if there are serious questions about worker classification.

This article can be found in the Summer 2019 Pietragallo Periodical: The Construction Legal Edge

This article is co-written by Gaetan J. Alfano and Leslie A. Mariotti

For more information about Worker Classification or other Employment matters, you can always contact our Attorneys direct.

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