Avoiding Employee Misclassification Under the FLSA
DOL Guidance Outlines ‘Economic Realities’ Test
In order for the federal Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay requirements to apply to a worker, the worker must be an “employee” of the employer, meaning that an employment relationship must exist between the worker and the employer. The FLSA defines “employ” as including to “suffer or permit to work,” representing the broadest definition of employment under the law, as it covers work that the employer directs or allows to take place. Applying the FLSA’s definition, workers who are economically dependent on the business of the employer, regardless of skill level, are considered to be employees. On the other hand, independent contractors are workers with economic independence who are in business for themselves.
Economic Realities Test
While the U.S. Department of Labor (DOL) finds that most workers are employees under the FLSA, in order to make the determination of whether a worker is an employee or an independent contractor, the DOL uses the multi-factor “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself. Each factor of the “economic realities” test is outlined below.
- 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. A true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business.
- Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? This factor should not focus on the worker’s ability to work more hours, but rather on whether the worker exercises managerial skills and whether those skills affect the worker’s opportunity for both profit and loss.
- How Does the Worker’s Relative Investment Compare to the Employer’s Investment? The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is involved in an independent business. The worker’s investment should not be relatively minor compared with that of the employer. If the worker’s investment is relatively minor, that suggests that the worker and the employer are not on similar footings and that the worker may be economically dependent on the employer.
- Does the Work Performed Require Special Skill and Initiative? A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent.
- 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. However, a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship. The key is whether the lack of permanence or indefiniteness is due to operational characteristics intrinsic to the industry or the worker’s own business initiative.
- What is the Nature and Degree of the Employer’s Control? The employer’s control should be analyzed in light of the ultimate determination of whether the worker is economically dependent on the employer or truly an independent businessperson. 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.
Additional information and resources on employee misclassification under the FLSA, including fact sheets and press releases, are available from the DOL’s Wage and Hour Division.
Note: Guidance on distinguishing employees from independent contractors for federal tax withholding purposes is available from the Internal Revenue Service.