What are some practical ways to tell if an independent contractor should actually be classified as an employee?
Quick Answer
Take into consideration a number of factors that assess whether the worker is economically dependent on the employer or in business for themselves.
Legal Perspective
Baker & Hostetler LLP
Cleveland, Ohio
It’s a really difficult question because there are different tests under different laws, and the tests keep changing, says employment lawyer Todd Lebowitz (tlebowitz@bakerlaw.com) of BakerHostetler, who runs the blog WhoIsMyEmployee.com.
In general, the tests most often ask whether the hiring party has the right to control how the work is done and whether the contractor is in an independent trade or business. This is an oversimplification, but here are five clues that may indicate you have an independent contractor who is misclassified:
- You direct how, when or where work is done. True contractors have control over their time, and they decide how to complete a project without supervision or direction.
- An outsider wouldn’t be able to tell your contractors from your employees, i.e., they do the same work.
- The individual only works for you. A contractor should have multiple clients.
- The individual has been with you for a long time and gets assigned to work on more than one project.
- The individual uses your equipment. Contractors should have their own gear.
Relevant Case Law
Ruiz v. Affinity Logistics Corp.
Crew One Productions, Inc. v. National Labor Relations Board
Dillon Construction and Accident Fund Insurance Co. of America v. Carter
HR Insight
The HR Solution
Weatherford, Texas
The IRS, EEOC, Supreme Court and state agencies all govern — and have their own criteria — for determining independent contractor status, says HR Consultant Ruth Bassham. Because of that, there is no single test list that can be used, and the final determination depends on the full picture, not any single component of the work.
Under all governing bodies, the key element is the amount of control the employer has over the worker. Generally speaking, a company that contracts with an independent contractor tells the contractor what the scope of work is, but doesn’t have any control over how the contractor achieves the desired result.
A short list to consider in qualifying a worker as an independent contractor:
- The worker is free from the control and direction of the hiring entity relative to schedule, methods, quality control, etc.
- The work requires a high level of skill or expertise.
- The worker neither supervises nor is supervised by the hiring entity’s employee.
- The worker has a distinct occupation or business of his own and furnishes tools, materials, and equipment to perform the work.
- The worker stands to make a profit or sustain a loss from the services provided.
- The worker provides services for other companies so is not financially dependent upon the hiring company.
- The worker may assign tasks to sub-contractors or his own employees.
- The work is outside the employer’s integral business purpose.
- The worker and employer understand they are creating a temporary contractual relationship rather than an employer/employee relationship for an indefinite period; and the contractor is responsible for his own taxes, insurance, benefits, and expenses.
The Cost of Noncompliance
Gig economy and independent contractors: Instacart pays $45.6M to delivery drivers
Who was involved: Instacart, a grocery delivery company, and approximately 308,000 workers in California who were improperly classified as independent contractors instead of employees.
What happened: The affected individuals worked for the company between September 2015 and December 2020. During that time, they were responsible for maintaining and fueling their personal vehicles, using their own phones and paying for other equipment, including PPE to protect against COVID-19.
Result: The company agreed to pay $45.6 million to end the dispute.
- The lion’s share of the settlement will go to workers. Individual restitutions will vary based on the number of hours worked, though the most productive workers are expected to receive thousands of dollars.
- More than $6 million in civil penalties is earmarked for a Consumer Protection Trust Fund, which will be used for the enforcement of consumer protection laws.
Info: City Attorney Delivers for Instacart Workers, 10/10/22.
DOL: Contractor misclassified workers to avoid OT pay
Who was involved: Konstrak Builders, a construction company that provides maintenance and repair services to Mobil gas stations on Guam, and 23 misclassified workers.
What happened: A DOL Wage and Hour investigation found the company deliberately misclassified employees as independent contractors to avoid paying overtime when workers exceeded 40 hours in a workweek, in violation of the Fair Labor Standards Act. As a result, 23 employees were paid straight-time wages for overtime hours worked. The company also failed to keep accurate payroll records.
Result: The company must pay $51,481 in back overtime wages to those workers. Moreover, the DOL assessed an additional $10,000 in civil penalties for the willful nature of the violations.
Info: DOL Finds Guam Construction Contractor Illegally Attempted to Avoid Paying Overtime, 2/18/21.
FLSA misclassification: Courier drivers to split $575K
Who was involved: USPack Logistics, LLC, a courier service, and 62 drivers who were misclassified as independent contractors in Boston.
What happened: An investigation by the DOL’s Wage and Hour Division found the company paid courier drivers per delivery rather than an hourly wage and also required them to pay vehicle expenses (gasoline, maintenance, and insurance). These practices resulted in the drivers making less than the federal minimum wage in violation of the Fair Labor Standards Act. The company also failed to maintain accurate records of hours worked, the DOL said.
Result: The company agreed to pay a total of $575,000 – $287,500 in back wages and another $287,500 in liquidated damages.
Info: Scalia v. USPack Logistics, LLC, 9/28/22.
Key Takeaways
- Assess whether the worker has an opportunity to make a profit or sustain a loss.
- Look at the relative investments made by the worker and the employer.
- Examine the degree of permanence of the work relationship between the worker and the employer.
- Look at the nature and degree of control exercised by the employer over the worker.
- Examine the extent to which the work is integral to the employer’s business.
- Assess the level of skill and initiative that is involved with the work.