The Labor Department's Wage and Hour Division issued guidance on July 15 about how to determine whether workers should be classified as employees or independent contractors. The delineation has crucial implications for a worker's eligibility for protections. This includes minimum wage, overtime pay, unemployment insurance and workers' compensation, as well as for assessing liability for employment taxes.
The guidance notes that the Fair Labor Standards Act defines employ as "to
suffer or permit to work" in concluding that the Act should be broadly
interpreted and cover most workers. Then, it describes the so-called
"economic realities" test. This test is used to determine whether a
particular employee is dependent on an employer and, therefore, suffered or is
permitted to work by the employer.
Under the economic realities test, described in detail by the guidance, the following factors must be considered in evaluating whether a worker is an employee or independent contractor:
- Extent to which the work performed is an integral part of the employer's business;
- The worker's opportunity for profit or loss depending on his or her managerial skill;
- Extent of the relative investments of the employer and the worker;
- Whether the work performed requires special skills and initiative;
- Permanency of the relationship; and
- Degree of control exercised or retained by the employer.
The guidance is clear that these factors must be considered holistically to determine whether a worker is economically dependent on an employer - and therefore classified as an employee rather than an independent contractor. None of the factors, including the one related to the degree of control exercised by the employer, is determinative by itself.