How Do Courts Decide Between an Independent Contractor and An Employee?

Your new job means more money and better opportunities — except that you’re an independent contractor, not an employee. What’s the difference? The short answer is the company’s degree of control over how you do your job. Does it matter? Yes. Being classified as an independent contractor means you must pay your employment taxes yourself. It also means you could lose out on benefits and other perks employees get.

Whether you’re an employee or an independent contractor is a complex question. The answer can depend on the facts specific to your situation. An employment lawyer can help if your boss misclassifies you as an independent contractor.

What Is an Independent Contractor?

An independent contractor is a self-employed worker who contracts to work for someone else as a non-employee. You’re paid to do the same or similar work as employees. What makes you an independent contractor depends on your working relationship with the company. Your legal employment status generally depends on how much control the company has over the relationship. The more control the company has, the more likely you’re an employee.

You’re not an independent contractor merely because you have an independent contractor agreement. The terms of the written contract can be a factor. But courts and the government also look beyond the agreement.

Why Does Contractor or Employee Matter?

When you’re an independent contractor, there’s no employer-employee relationship between you and the company. That means your employer doesn’t withhold income taxes from your wages. You also must pay your own Social Security and Medicare taxes.

Worker classification matters under state law also. State laws determine your worker status for workers’ compensation and unemployment insurance.

Worker status affects more than who pays unemployment taxes. It determines whether you receive employee benefits, like health insurance and paid vacation. These benefits can be a significant part of your wage.

Small business owners want to keep business expenses low. That creates an incentive to classify you as an independent contractor. But sometimes, companies misclassify workers so it doesn’t have to provide benefits.

How Does the Government Decide Between the Two?

Courts and government agencies use the three following sources to determine employment status:

• Common law
• The Right to Control Test
• The Economic Realities Test

Common Law Principles of Worker Status

Some government agencies use common law principles when reviewing worker status. The Internal Revenue Service (IRS) is an example. The common law focuses on the following factors:

• Does the company control what you do and how you do it?
• Are you on the company payroll and receive a regular paycheck?
• Can the company fire you at any time? Is there an expectation that the working relationship will continue?
• Is there an expectation of exclusivity, or are you allowed to work for other companies?
• Does the company supply the tools to do the job, or do you provide your own tools?
• Do you control the hours you work?
• Is the nature of the work you’re doing integral to the company?

The Economic Realities Test

The economic realities test is a statutory test under the Fair Labor Standards Act (FLSA). The FLSA is a federal law enforced by the U.S. Department of Labor. It sets standards like the minimum wage and overtime pay.

The economic realities test focuses on the degree to which you’re economically dependent upon the company. You’re likely an employee if a large part of your wage comes from the company.

The Right To Control Test

The right-to-control test focuses on how much the company controls your work. Under this test, the performance of the work matters most. You could be an employee if the company controls how you do the job.

Determining the company’s degree of control over your work can be complex. The following are some factors you can look to:

• You must follow the company’s instructions
• The company trains you on how to do the work
• You’re not allowed to hire someone else to do the job
• The employer tells you when you can work
• You must report to the company on the work performed

Contact an Employment Lawyer for Help

The use of independent contractors has grown in recent years. Many business owners want to have an independent contractor relationship. That lets them lower their business expenses. But they also want to control how you do your job, which means it may misclassify you. If you think you should have employee status, speak to an employment law attorney near you. They can give you legal advice about your situation.