The Difference between an Employee and a Contract Worker

In the wake of increased government regulation including the Affordable Care Act, many employers have misclassified their employees as “contractor workers.”  In response, the Department of Labor (“DOL”) has issued an Administrator’s Interpretation to clarify the difference between employees and contract workers.

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The Fair Labor Standards Act (“FLSA”) broadly defines the term “employ” as “to suffer or permit to work.”  The DOL uses this definition, and has reemphasized that “most workers are employees under the FLSA’s broad definitions.”

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In addition to the FLSA definition, the DOL endorses the “economic realities test” used by courts to determine if an individual is an employee or a contract worker.  The economic realities test considers many factors, including:

(1)   the extent to which the work performed is an integral part of the employer’s business;

(2)   the worker’s opportunity for profit or loss depending on his or her managerial skill;

(3)   the extent of the relative investments of the employer and the worker;

(4)   whether the work performed requires special skills and initiative;

(5)   the permanency of the relationship; and

(6)   the degree of control exercised or retained by the employer.

Although these factors are all considered together and no one factor is dispositive as to classification, courts have historically viewed the employers degree of control over the work performed and the employee/worker as the most important when determining if one is an employee or a contract worker.

In its latest interpretation, the DOL diminished the importance of the employer’s control as a factor of the economic realities test.  In other words, even if an employer has little control over the work being performed, the worker may nonetheless be classified as an employee and not a contract worker.

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The DOL’s interpretation is consistent with the current trend to improve the wages and rights of workers.  Employers who rely on independent contractors should be clear on what does and does not constitute an employee, and should be cautious not to misclassify employees as contract workers.

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