Employee or independent contractor? That is the question

Whether a worker is an employee or an independent contractor is one of the most important questions in employment law.

Both are terms for people who get paid to perform work, but they also represent key distinctions in the nature of the working relationship that carry major legal consequences.

Only employees covered by the Fair Labor Standards Act, for example, are entitled to overtime pay. Employees also are protected by workers’ compensation laws, while independent contractors generally are not.

Unions support workers being classified as employees, which allows them to be unionized.

The recent boom in remote work arrangements and the gig economy — short-term jobs — once again has brought the distinction between employees and contractors to the forefront.

In addition, the state of Washington recently enacted legislation effective Jan. 1, 2023, that will provide “ride share drivers” working for companies such as Uber protections as workers’ compensation, minimum earnings and paid sick leave while still continuing to drive as so-called independent contractors.

June 3, 2022, the U.S. Department of Labor announced it intends to engage in another rule-making on determining employer independent contractor status.

The Labor Department previously published a rule under the previous administration, in January 2021, to take effect March 2021, but later withdrew it.

However, in March of this year a federal district court in Texas vacated the Biden administration’s delay rule and determined the rule took effect as of its original effective date in March 2021. The Labor Department is appealing that decision and, in the meantime, is seeking additional public comment on developing its independent contractor proposal.

Hopefully, any rule will continue to reaffirm the traditional “economic reality” test, which asks whether the workers are in business for themselves (suggesting they are independent contractors) or economically dependent on another entity for work (suggesting they are employees).

Most courts already use this test or a version of it. However, the DOL’s rule identifies two new “core factors” to help determine whether the workers are in business for themselves:

These factors reflect those pioneered by early court decisions attempting to sort out whether gig economy workers are employees or contractors.

Uber, for example, won a lawsuit in Pennsylvania several years ago when a federal judge ruled that Uber did not exert enough control over its drivers to be considered their employer. The judge noted the drivers only worked when they want to and were free to nap, run personal errands or smoke cigarettes in between rides.

The Labor Department’s rule also identify three other factors that employers and courts may use as guideposts when the two “core factors” do not resolve the question:

When evaluating these factors together, the Labor Department instructs that the focus should be on the actual working relationship and not what may be contractually or theoretically possible.

With a possible new rule in the works, employers already should be mindful about the distinction between employees and contractors.

What kind of workforce you have represents a calculated business risk. If you or your company seek to hire an independent contractor, know the red flags that many employers ignore.

Be careful of hiring former employees under the title of independent contractor to perform the same job as before — these personnel probably will be employees as a matter of law.

You also should be careful of hiring independent contractors to do the same job as your employees.

Lastly, keep independent contractor records in vendor files, not employee files, and require that independent contractors submit invoices to you for payment.

Wilford H. Stone is a lawyer with Lynch Dallas in Cedar Rapids.