One question that arises often in operating a business is whether or not your worker is an independent contractor or an employee. In mid-July 2015, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued Administrators Interpretation 2015-1: “Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.” The purpose of the Interpretation is to provide “guidance regarding the application of the standards for determining who is an employee under the Fair Labor Standards Act [FLSA] … to the regulated community in classifying workers and ultimately in curtailing misclassification.”
Under the FLSA, Federal Courts use the multi-factorial “economic realities” test. This test focuses on whether the worker is economically dependent on the employer or in business for him or herself.
Under the Interpretation a worker who is economically dependent on an employer or permitted to work by the employer would as a consequence be considered an employee under the FLSA. This would most likely include most anyone under the FLSA.
The Interpretation also discusses each of the factors in the Federal multi-factor test:
A. Is the work an integral part of the employer’s business?
B. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
C. How does the worker’s relative investment compare to the employer’s investment?
D. Does the work performed require special skill and initiative?
E. Is the relationship between the worker and the employer permanent or indefinite?
F. What is the nature and degree of the employer’s control?
The focus under the Interpretation on “economic realities” for application of the FLSA is different than other tests that are used to determine whether a person is an employee or independent contractor, especially in California. In Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522, the California Supreme Court recognized that different tests existed under a variety of Federal and State wage orders and decided to apply a common law test at variance with all of them. It focused on the common law test that asks whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.
The default position by California law is that a worker is an employee. As a result of the variety of competing tests used to determine whether or not a worker is an employee or independent contractor, it behooves all those who hire independent contractors to have written independent contractor agreements that address all of the factors raised by all of the potentially applicable tests. Then, should the issue arise – and it arises frequently in wage and hour litigation – you and your business will be in the best position possible to successfully refute contentions of employee status by independent contractors.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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