December 29, 2015
Definition of Employee.
The Fair Labor Standards Act (“FLSA”) applies only where an employee/employer relationship exists. Such an arrangement exists wherever an employer “suffers or permits” another person to work. Not all workers are covered by the Fair Labor Standards Act. Certain employees are, by statute, “non-covered.” Other employees are “exempt.” Non-covered employees include elected officials and their personal staffs, policy-making appointees, legal advisors, legislative employees, volunteers, independent contractors, prisoners, and certain trainees. Exempt employees include executive administrative and professional employees and other specific categories of workers that will be discussed hereafter.
B. Independent Contractors.
There is no single rule or test for determining whether an individual is an independent contractor or an employee. Under the FLSA, courts typically apply an “Economic Realities” test. The Economic Realities test springs out of the United States Supreme Court decision Goldberg v. Whitaker House Cooperative, 366 U.S. 28 (1961). The six factors that are usually reviewed when considering the economic realities of an employment situation include:
1. The degree of control exercised by the hiring party over the worker;
2. The investment made by the worker in the enterprise;
3. The worker’s opportunity for loss or profit;
4. The permanency of the arrangement;
5. The skill, training or certification required for the work;
6. Whether the work constitutes an integral part of the hiring party’s business.
Application of these tests is no simple matter. The facts of each case will control. The following list gives examples of workers that have been found to be employees despite the employer’s contention that they were independent contractors:
1. Waiters and Waitresses
2. Security Guards
3. Truck Drivers
4. Real Estate Salespersons
5. Cake Decorators paid on a per-cake basis
6. Employment Counselors
7. Parking Lot Valets
8. Topless Dancers
Examples of occupations in which an independent contractor relationship has been found include:
1. Carpet Layers
2. Computer Programmers
3. Cosmetologists
4. Welders paid on a piece rate basis
5. Carpenters
6. Television Installers
7. Air Conditioning Installers
The facts and circumstances of each case must be carefully analyzed to determine if an independent contractor or employment relationship exists.
Guidelines published by the Internal Revenue Service may also provide assistance in making the employee/independent contractor determination. For all employment tax purposes, the Internal Revenue Code and the Treasury Regulations had specifically adopted the common law test for determining the existence of an employer-employee relationship, utilizing 20 factors to determine whether an individual is an independent contractor or an employee.
In January 1997, the IRS issued new guidelines to determine whether an individual is an employee or an independent contractor. Now, the entire relationship between the worker and the business must be examined. All evidence of control and independence must be considered. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties, as described below.
1. Behavioral Control
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
Instructions the business gives the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved.
Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
2. Financial Control
Facts that show whether the business has a right to control the business aspects of the worker’s job include:
The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees also may incur unreimbursed expenses in connection with the services they perform for their business.
The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not required.
The extent to which the worker makes services available to the relevant market. For example, does the worker have business cards and does the individual participate in advertising his or her services? An independent contractor is generally free to provide his or her services to two or more unrelated persons or companies at the same time.
How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job. However, it is common in some professions, such as law, to pay independent contractors hourly.