Determining if a worker is an employee or an independent contractor is often confusing to employers. Establishing the right classification is crucial for organizations to comply with the federal Fair Labor Standards Act (FLSA).
The US Department of Labor (DOL), Wage/Hour Division developed an “Administrator’s Interpretation” to guide employers about the differences between an employee versus an independent contractor. The “Interpretation” declares that most individuals should be classified as employees.
The Internal Revenue Service (IRS) and Wage/Hour Division continue to consider employee classification to be a high priority item. Employers need to familiarize themselves with this information and consider how it impacts the way they classify workers.
The DOL has established that a worker is classified as an employee or independent contractor under the FLSA based on an “economic realities” test. This test questions if the worker is “economically dependent” on the employer or if he is truly in business for himself. If the worker is economically dependent on the employer, then he should be classified as an employee rather than an independent contractor.
The economic realities test addresses six factors and gives real world examples for each. The factors are:
- Is the work an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
The Administrator’s Interpretation concludes by saying: “Most workers are employees under the FLSA’s broad definitions.”
The Employers Association
