If it looks like “Independent Contractor vs. Employee Week” on Labor & Employment Law Perspectives, that may be a function of the fact that misclassification of employees as independent contractors has been a hot topic for some time and shows no signs of cooling down. There is a focus on the topic by the U.S. Department of Labor (DOL) as well as frequent litigation in both state and federal courts challenging the classification of independent contractor workers as employees. Given the amount of litigation and legal ink continuing to be spilled on the topic, it never hurts to revisit the kinds of questions implicated by this topic. When is an independent contractor more accurately categorized as an employee? What are the consequences of getting it wrong?

Part of what makes independent contractor questions so vexing is the fact that there is no uniform standard that governs contractors across states. To determine the appropriate classification, employers may need to use a different test under the federal Fair Labor Standards Act (FLSA), the state’s specific wage and hour laws, and the state agency’s rules governing whether a worker is eligible for unemployment insurance benefits or if they are covered under the employer’s workers’ compensation policy. Despite this lack of uniformity, the validity of an independent contractor classification generally turns on several salient factors that make their way into each legal test in some form or another.

Generally speaking, an independent contractor is hired by a person or entity to perform a certain service for a fee. For a valid classification to occur, the business or individual engaging the worker typically does not have meaningful control over the process that the contractor uses in order to get the business or individual the desired result. However, if the “economic realities” of the relationship more closely resemble an employment relationship, it is highly likely a court or administrative agency will find the worker to be an employee. This “economic realities” test typically involves some version of the following factors:

  1. The permanency of the relationship between the parties
  2. The degree of skill required for the rendering of the services
  3. The worker’s investment in equipment or materials for the task
  4. The worker’s opportunity for profit or loss, depending upon his skill
  5. The degree of the alleged employer’s right to control the manner in which the work is performed
  6. Whether the service rendered is an integral part of the alleged employer’s business

In a July 2015 Interpretation letter, the Administrator of the DOL’s Wage and Hour Division explained that the ultimate question is whether the contractor is economically dependent on the employer. If so, the contractor is actually an employee under the FLSA’s broad definition of “employee” as someone that the employer “suffers or permits to work.”

The consequences of misclassification of employees as independent contractors can lead an employer to run afoul of the FLSA’s requirements for minimum wage and overtime. Depending on the number of independent contractors that have been misclassified, the ultimate cost to the company can be great in the form of a class or collective action seeking back wages and overtime as well as penalties allowed under the federal statute. And that does not even account for what additional liabilities might exist under state wage and hour laws.

A recent California case provides a nice illustration of how courts look at these situations and the facts upon which they focus. In the case, an appellate court determined that that a lower court had incorrectly determined that a woman who worked as a hostess and server for a private card club was an independent contractor operating a “mini catering service” rather than an employee. She was not paid any wages by the club and instead was paid only in tips by the customers of the club. She was required to launder tablecloths at her own expense and was not reimbursed for food and beverages that she purchased and served the customers. The court ruled that the case should not have been dismissed and could proceed to a determination of whether the woman was an employee. Key factors weighed by the appellate court were that the club controlled her schedule, reprimanded her when she was late, used the club facilities to prepare the food, and directed her to serve particular foods, among other issues.

Given such a fact-intensive review on the part of the courts and agencies regarding the job duties, and roles of both the company and the worker, any business using independent contractors is very wise to review its current practices to determine if it faces risk in this area.