We have written often about the federal government’s push for businesses to consider their workers as employees rather than independent contractors. Recent developments show there is no hotter personnel button for the federal government.
The spotlight is on companies that pay workers on a piece-work basis. As an example, The Washington Post recently ran an article discussing this practice used by car detailing services. There have been two recent federal lawsuits in Northern Virginia against these companies that classified workers as independent contractors and paid them based on the number of cars washed, but underpaid them under the Fair Labor Standards Act because the lawsuits allege because they should have been classified as employees. The workers banded together to sue their employers seeking overtime wages, punitive damages and attorney’s fees.
While it is common practice for companies to properly and legitimately use independent contractors for certain work, some categorize workers as independent hoping they are correct and will avoid numerous obligations owed to employees. The government’s strong presumption that workers should be employees absent clear evidence to the contrary make this a wish that may not come true. Designating a worker as independent, even in a contract, does not mean an employer is free from the requirements of withholding taxes or paying minimum and overtime wages under the Fair Labor Standards Act. The label is not determinant – it is the reality of the employment relationship that is determinant.
Courts employ the ‘economic realities’ test to determine whether the independent contractor designation is appropriate. The ‘economic realities’ test is a consideration of various factors used by courts to determine whether a worker is economically dependent on the employer and, therefore, an employee, or is in a separate business as an independent contractor. Such factors include:
- Is the work performed integral to the employer’s business? If yes, then it is more likely that the worker is dependent economically on the employer.
- Do managerial skills affect the worker’s opportunity for profit or loss? If the worker hires and supervises other workers, or invests in equipment, and in doing so affects the opportunities for both profit and loss, then the worker is not likely to be dependent economically on the employer.
- Has the worker made some investment, thereby bearing some risk, compared to the employer’s investment? If so, that demonstrates that the worker is an independent contractor.
- Does the worker’s skills indicate that he or she exercises independent business judgment? If so, that suggests independent contractor status.
- Is the worker’s relationship with the employer permanent/indefinite? If yes, that would indicate employee status.
- What degree and nature of control does the employer have over the worker? If the employer controls the pay amount, work hours, how the work is performed, and whether the worker may take on other work outside of the employer, that would indicate employee status.
For businesses, properly classifying employees at the beginning is important – not only to avoid costly litigation – but to avoid scrutiny of the overall business model. Uber – the well-known ride-sharing service – classifies its drivers as independent contractors. In California, Uber recently received an unfavorable ruling by a federal judge allowing Uber drivers to form a class in a lawsuit claiming employee status and seeking reimbursement for expenses such as fuel and insurance, and unpaid tips. In that litigation, if those drivers are ultimately determined to be employees and not independent contractors, they will also be entitled to unemployment coverage and workers’ compensation. And this will no doubt open the company to further litigation in other states beyond California.