Are You an Independent Contractor or an Employee?
Last updated Thursday, April 20th, 2023
The internet has made it easier than ever for workers across Texas, the country, and the globe to engage in side hustles and other jobs on a work-for-hire basis. This general arrangement is often referred to as the “gig economy,” and it is only getting larger. Knowing when is an independent contractor actually an employee can help you.
Central to the gig economy is the claim that those who provide gig services are independent contractors and not employees. Employers often prefer to work with so-called independent contractors because of the many expenses that come along with hiring employees, such as payroll taxes, benefits, and possible overtime liability. The problem is that workers must meet multiple criteria to be considered independent contractors. Many employers, seeking to maximize profits, skirt the rules when it comes to worker classification. We’ll take a look at the criteria used to determine the classification of a worker and explain why it matters to workers when they are not classified correctly.
When is an independent contractor actually an employee – Independent Contractor Tests
There are more than a few tests out there that private and public entities use when classifying workers. These tests vary from state to state – and from purpose to purpose. For example, a worker can be properly classified as an independent contractor for purposes of paying taxes but should be classified as an employee for purposes of determining if they are owed overtime compensation for hours worked over forty in a week.
The Fair Labor Standards Act (FLSA) considers whether the worker is economically dependent on the employer. If so, then the worker is an employee. The Supreme Court of the United States in a case United States v. Silk, 331 U.S. 704, 67 S. Ct. 1463, 91 L. Ed. 1757 (1947) described a non-exhaustive set of factors to consider to determine if the person is an employee:
- Degree of Control. How much control the employer exercised over the worker is one factor. Evidence of control can include things like close supervision, the setting of schedules, performance evaluations, directions & instructions, required training or tools, and many others.
- The extent of Relevant Investments. Courts will evaluate how much investment the worker has in the business, as compared to the employer. An independent contractor likely has large investments in tools, marketing, sub-contractors, and others. Employees generally have less investment, with any expenses being far outweighed by the employer’s investment. Of note, the entire investment of the enterprise is evaluated against each individual worker’s investment – the workers’ investments are not aggregated so that a large group of workers each with small relative investments does not weigh in favor of independent contractor status for the group.
- Employer Control of Profit and Loss. If the alleged employer controls the factors for profit and loss, then the worker is more likely to be considered an employee. For example, a sales representative who cannot determine what goods she sells, the prices, the terms of the sale, or the marketing and branding of the goods is largely dependent on the employer to offer marketable goods at a fair price, set reasonable and attractive terms, and adequately advertise for sales. The employer controls the factors that determine whether the worker can make sales. Likewise, a waiter at a restaurant is at the mercy of management to determine what kind of restaurant it is, what kind of food and drinks it sells, what kind of advertising it does, and what kind of clientele it caters to. All of these affect the tips the waiter will receive.
- Skill and Initiative are Required. Work that requires highly specialized skills and independent initiative is more likely to be independent contractor work. A worker possessing specialized skills can sell those skills in the marketplace, negotiating with various clients for the provision of skilled work.
- Permanency of Relationship. The Courts recognize that an independent contractor relationship is usually limited and temporary. Most employees, however, work for an indefinite period. When a worker has been employed for many years it suggests that there is economic dependence on the employer.
Recent cases have added a sixth factor for consideration:
- How Integral the Worker is to the Business. Independent contractors are more commonly used to provide limited specialized services. If the primary work of the business is being done by a worker, then that worker is likely to be an employee. For example, waiters and cooks are integral to the service of patrons at a restaurant. But a plumber fixing a clogged drain is not doing the core work of the business. While the services of the plumber may be critical, they are not integral to the work of the business the way the waiters and cooks are.
Why Does Worker Misclassification Matter to Workers?
It matters because, simply, wrongly classified independent contractors miss out on overtime pay, minimum wage, workers’ compensation insurance, and other benefits they are otherwise entitled to. This is money out of workers’ pockets. The sentiment behind independent contractors is that the contractors exert much more freedom when it comes to their money-making opportunities in exchange for fewer workplace benefits. Losing this freedom but not gaining the benefits associated with doing so is when misclassification becomes a big problem for workers.
Wyly & Cook Can Help Get You Compensation
Just because your employer claims you are an independent contractor doesn’t mean you actually are one. There are numerous benefits for employers to misclassify their employees, and they won’t be interested in doing the right thing unless you get a competent and experienced law firm working for you.
Wyly & Cook is well-equipped to effectively handle your wage or hour claim. These are complex issues and we have a track record of success. If we are successful in court and a judge or jury rules that you should be classified as an employee instead, you are eligible to receive up to three years of back pay, damages worth double the amount of your unpaid wages, and reimbursement on attorney’s fees. Ready to discuss your options with our team? Call us today at 713-236-8330 to start your free consultation.