The Economic Dependence Test for Independent Contractors

The Department of Labor reports that most workers are employees and that classifying employees incorrectly as independent contractors robs employees of their benefits.

It also robs the government of their taxes. You can be sure they are serious about enforcing the FLSA and catching the employers who misclassify their employees.

If you have any doubt about the status of your workers, become familiar with the rules before you classify them as contractors.

Independent Contractors Test – Economic Realities

The Department of Labor devised an “economic realities” test for independent contractors which they use in court cases (and which employers and employees can use) to guide them as to the status of a worker. These factors “are helpful guides in resolving whether a worker is truly in business for himself or herself, or like most, is economically dependent on an employer…”

You can start to hone in on whether a worker is an employee if:

1. The work performed is an integral part of the employer’s business.
2. The worker’s managerial skills don’t affect his or her opportunity for profit and loss.
3. The worker has little to no investments in facilities and equipment.
4. The employer has ultimate control over the pay, hours, and type of work performed.
5. The worker is a skilled trade worker (although this may be irrelevant).
6. The worker has some amount of permanency with the employer.

All of these factors are important but they are not exhaustive. There is one last question that best helps to make the determination:

“The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself.”

Economic Dependence

This is the question managers and business owners should ask themselves before classifying their workers as employees or independent contractors. The DOL considers most workers employees and places the onus on the employer to prove otherwise. Hence, employers should be ready to make a good case.

“Workers who are economically dependent on the business of the employer, regardless of skill level, are considered to be employees, and most workers are employees.”

An easy question to answer…

This is probably the most useful guide the DOL provides with regard to this question. Is the worker in business for him/herself, using you as one of many sources of income? And consequently, would the worker have no income without your financial support? Of all the tests and lists on the subject of identifying an independent contractor, this one question may be the most revealing.

…But not always relevant

There are cases in which this question does not provide an answer. For example, an independent contractor may take long contracts with a single client. In this case, if the employer cut the project, the contractor would be without work. However, part of the contractor’s skill set is to find new clients. They don’t go job hunting, but client hunting, so they would probably be back on their feet quicker than a regular employee who would need to submit applications and attend interviews.

This also may not be the best indicator for an contractor who is out of work or in a recession. They may depend solely on one client and not have any luck finding more work under certain circumstances. This does not mean they are employees though. They are just independent contractors who are low on work. In these cases, the other factors are more revealing, such as the fact that the worker does not have permanency.

As you can see, the long list of factors for identifying employees is very helpful in making a determination.

Employees need to track time.