Employee or Independent Contractor

Why Does It Matter?

Fair Labor Standards Act (FLSA) regulates Wage and Hours of employees (applies to employers whose annual sales total $500,000 or more or who are engaged in interstate commerce).

  • FLSA requires employees get overtime for hours > 40 in a given workweek
  • FLSA guarantees employees’ minimum wage
  • FLSA has timekeeping obligations for employers to track non-exempt employees’ hours worked
Internal Revenue Service (IRS)
  • Employers are responsible for paying employees FICA and Social Security taxes.
Why Employees Care?

Advantages of being an Independent Contractor (Form 1099-MISC):

Some Employees Want to be Designated as an Independent Contractor:

IRS Schedule C tax advantages include the ability to deduct expenses from income such as a home office, supplies, phone, car, etc.

Disadvantages of being an Independent Contractor:

  • Independent Contractor’s don’t get overtime or benefits such as paid vacations or healthcare
  • Independent Contractor’s don’t get paid sick leave
  • No Workers Compensation insurance in case of workplace injury
  • Anti-discrimination laws do not protect you
  • Independent Contractor’s pay both the employer and employee portion of FICA tax
    • Social Security tax: The 6.2 percent employer component (half of the 12.4 percent total)
    • Medicare tax: The 1.45 percent employer component (half of the 2.9 percent total)

Independent Contractor’s are responsible for an additional 7.65 percent of their earnings in FICA taxes

NOTE: Just because employee desires treatment as an Independent Contractor does not mean he or she is one!

Why Employers Have Incentive to Misclassify

Independent Contractor’s are generally cheaper labor

  • No health benefits
  • No FICA
  • No paid vacation
  • No overtime
  • No retirement benefits
  • No unemployment benefits
  • No workers comp
  • IC’s cannot unionize

BEWARE: Penalties for misclassification are STEEP!

U.S. Dept of Labor’s New Economic Reality Test

Previously, a multifactor economic reality test was used by courts since the 1980s and the DOL since the 1950s attempting to balance and apply multiple factors to countless employment relationship fact patterns often with lack of clarity.

In January the U.S. DOL adopted new rule which reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).

The DOL’s new test gives permission for gig economy companies to continue to classify most of their workers as independent contractors.

DOL’s Core Factors

New DOL Rule identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:

  1. The nature and degree of control over the work
  2. The worker’s opportunity for profit or loss based on initiative and/or investment
When Two Core Factors Lead to a Different Conclusion, the Analysis Continues

Three other factors that may serve as additional “guideposts”:

  1. The amount of skill required for the work;
  2. The degree of permanence of the working relationship between the worker and the potential employer; and
  3. Whether the work is part of an integrated unit of production, meaning important or central to the potential employer's business.

The actual practice of the worker and the employer is more relevant than what may be contractually or theoretically possible.