Are You Suffering? Congratulations, You’re Employed!

Winston Churchill once remarked: “To work is to suffer a small death every day, unless you work for yourself.”

Actually, in full disclosure, Churchill never said that – I just dreamed that quotation up.  Nevertheless, if you are like many Americans, you know the joy and satisfaction of self-employment. You set your own hours, and control the work flow. You call the shots. You are the boss.

As it turns out, an increasing number of employers also like – even encourage – their workers to demonstrate a bit of self-governance, to “work for themselves.” That is, so long as that independence allows the company to classify the worker as an independent contractor.  Why?  Because when employers label workers as “independent contractors,” they are often relieved of complying with a number of obligations set forth in the Fair Labor Standards Act (FLSA), including requirements relating to minimum wage, overtime compensation, unemployment insurance, and workers’ compensation.

Recently, the U.S. Department of Labor issued an interpretation of the FLSA’s “Suffer or Permit” standard to add clarity to when workers are properly classified as independent contractors. In short, the Department of Labor is focusing its attention on the growing trend for employers to improperly classify workers as independent contractors to avoid the FLSA.

So, what does this mean if you are starting a business, or you own a small business?  Or, what if you’re the worker stuck in the 1099 trap?  The Department of Labor’s recent guidance described the “Economic Realities Test” for determining whether a worker should be classified as an employee or independent contractor.

Economic Realities Test

Why the clever title for this article?  Well, the FLSA broadly defines “employ” as “to suffer or permit to work.”  In this case, Congress used the word “suffer” in the Old English sense (think: “I do not suffer fools!”).  In their recent guidance, the Department of Labor highlighted the definition of employ to point out that most workers are employees under the statute.

Whenever the independent contractor status of a worker is challenged, usually by the worker, Courts evaluate the employer-worker relationship by utilizing the Economic Realities Test.  Courts look at a number of factors under this test to determine whether the worker is operating an independent business, or if the worker is economically dependent on the employer. For an employer deciding how to classify a worker, or a worker challenging the 1099 classification, the following questions are informative:

1. Is the work an integral part of the employer’s business?

This first factor is tough to apply.  Frankly, it’s best described by reference to Billy Joel’s Shades of Grey:

Shades of grey wherever I go;

The more I find out the less that I know;

Black and white is how it should be;

But shades of grey are the colors I see.

In other words, there is no clear-cut answer, and each employer/worker must evaluate this question within the context of the business and the particular worker whose status is in question. If the work performed by the worker is integral to the business, it is more likely that the worker is economically dependent on the employer, and therefore, an employee. The less integral the work being performed, the more likely the worker is properly classified as an independent contractor.

The Department of Labor offers the example that for a construction company framing residential homes, the work done by a carpenter is integral to the employer’s business. However, for that same construction company, the work performed by a software company in helping the business track bids and schedule projects, would not be an integral part of the business.

2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?

The working world is often a hustle and a grind. With big risk come big rewards … and the possibility of big loss. A worker who operates a truly independent business is susceptible to incurring loss. Conversely, a worker who is an employee of a business is less vulnerable. If the worker’s managerial skill impacts that worker’s opportunity for profit and loss, there is a greater probability that the worker is an independent contractor. The Department of Labor advises that in evaluating this factor, employers should not focus on the worker’s ability to work more hours, thereby increasing his profits, but rather should look to whether the worker exercises managerial skills that affect the worker’s opportunity for profit and loss.

3. How does the worker’s relative investment compare to the employer’s investment?

While it is common for workers to expend some amount of financial resources in the performance of a job, such as purchasing specific tools or supplies necessary for completing the work, an independent contractor typically makes investments that sustain the business beyond any one particular job. The worker’s investment in the work being performed should be evaluated relative to the employer’s investment. In other words, even if the worker makes a five-figure investment in the project, that financial expense may not support a finding of independent contractor status if the investment represents a small percentage of the total cost of the work. If the worker’s investment is relatively minor in comparison to the employer’s investment, there is a possibility that the worker may be economically dependent on the employer, and more accurately considered an employee.

4. Does the work performed require special skill and initiative?

Everyone likes to believe they are irreplaceable, that they have some special skill set that cannot be matched or rivaled. And everyone is special … to someone in the world. After all, the world is a big place, so the odds are in your favor. However, in a number of cases, courts have interpreted this factor of the Economic Realities Test to narrowly define what types of work constitute “special skill.” For instance, skills that, while technical, can be learned by a worker in a short period of time are often not regarded as “special.” In addition to possessing technical skill, the worker must demonstrate and exercise business acumen, judgment, or initiative. Only workers in highly specialized occupations (e.g. carpenters and electricians), operating independent businesses, are independent contractors.

5. Is the relationship between the worker and the employer permanent or indefinite?

There is a growing trend, ably demonstrated by the Millennial Generation, which encourages the lack of commitment in relationships. Similarly, truly independent contractors tend to shy away from permanent relationships with employers, and the dependence that comes with such associations. The key in evaluating this factor is whether the lack of permanence, or the indefiniteness, of the employer-worker relationship is characteristic to the business, or due to the worker’s “own business initiative.” While a lack of permanence in the employer-worker relationship may indicate independent contractor status, this factor must be carefully reviewed in determining the proper classification of the worker.

6. What is the nature and degree of the employer’s control?

This element of the Economic Realities Test gauges the classic power struggle present in the modern-day American workforce. In other words, who “wears the pants” in the relationship? If a worker is to be properly classified as an independent contractor, the worker must control meaningful aspects of the work performed. Where the worker lacks control in his relationship with the employer, there is a greater chance that the worker is economically dependent on the employer, and therefore appropriately classified as an employee. Courts have been quick to note that this factor should not be assigned greater weight when determining the worker’s classification, but should be evaluated in context and weighed against the other factors of the Economic Realities Test.

Form 1099 Is Not Enough!

In short, the Department of Labor is cracking down on the growing trend of labelling workers as “independent contractors” in an attempt to skirt obligations under the FLSA. The common practice of employers engaging workers through a Form 1099 is no longer indicative of an employee’s classification. Rather, courts will evaluate the factors of the Economic Realities Test qualitatively to determine whether the worker is truly independent of the employer, or whether the worker is more properly classified as an employee, and therefore entitled to broad protections under the FLSA.

If you ever have specific questions about how your company should classify a worker, or whether you, as a worker, should be classified as an employee, please do not hesitate to contact me directly at (513) 852-6071 or by emailing me at bwfox@woodlamping.com.

By: Brian W. Fox  and Laura Napolitano

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