The U.S. Department of Labor's Wage and Hour Division (WHD) has recently issued detailed guidance on how workers should be classified under the Fair Labor Standards Act (FLSA). The Department emphasizes that classification of workers should not be solely based upon the amount of control the business has over the worker. The FLSA includes definitions of employment that consider whether or not the individual is dependent upon the business. The guidance states that a multifactor "economic realities" test should be used to determine whether a worker is an employee or an independent contractor under the FLSA. Each of these factors is discussed below.

1. Is the work an integral part of the employer's business? If the work performed by a worker is integral to the employer's business, it is more likely that the worker is economically dependent on the employer. The guidance includes the example of a construction company that frames residential homes. Carpenters are considered integral to the employer's business because the company is in business to frame homes, and carpentry is an integral part of providing that service. This is indicative of an employment relationship.

The same construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company's business. This is indicative of an independent contractor relationship.

2. Do the worker's managerial skills affect the worker's opportunity for profit or loss? Workers in business for themselves face the opportunity to not only make a profit, but also to experience a loss. The guidance includes the example of a worker who provides cleaning services for corporate clients. The worker performs assignments that are only determined by the cleaning company. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. This is indicative of an employment relationship.

On the other hand, a worker who provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients, exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor relationship.

3. How does the worker's relative investment compare to the employer's investment? If the worker's investment is relatively minor as compared to the employer, it suggests that the worker and the employer are not on similar footing and that the worker may be economically dependent on the employer.

For example, a worker provides cleaning services for a cleaning company. The worker is issued a Form 1099MISC, Miscellaneous Income, each year, and signs a contract stating that she is an independent contractor. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relatively minor investment of the worker as compared to the employer is indicative of an employment relationship between the worker and the cleaning company. The fact that she received a Form 1099MISC should not be considered in determining whether she is an employee or an independent contractor.

4. Does the work performed require special skill and initiative? The use of special skills is not in itself necessarily indicative of independent contractor status if the workers do not use those skills in any independent way. For example, a highly skilled carpenter who provides carpentry services for a construction firm may be classified as an employee if he does not make any independent judgments at the job site beyond the work that he is doing for that job. In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.

5. Is the relationship between the worker and the employer permanent or indefinite? Permanency or indefiniteness in the worker's relationship with the employer suggests that the worker is an employee. The guidance includes the example of an editor in a publishing business. She has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house's specifications, using its software. She only edits books provided by the publishing house. This scenario indicates a permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship.

6. What is the nature and degree of the employer's control? The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business. An example is a registered nurse who provides skilled nursing care in nursing homes and is listed with Beta Nurse Registry. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship.

All possible relevant factors should be considered, and cases must not be evaluated based on the control factor alone. Each of the above factors should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor), or is economically dependent on the employer (and thus is an employee).

As always, if you have questions about any of the information listed above, please feel free to contact us here at Mierendorf. We’re always happy to help!